The keys to deciphering solicitation consequences of "key personnel"

This post is built around the GAO protest decision in Deloitte Consulting, LLP, B-416882.4. As often warned, I make use of resources as tools to make a didactic point, even if it stretches the facts or law of the article or case. So, read the case at the link, and don't come back to me saying you were misled. I often paraphrase, reorganize, omit, insert, and generally slice and dice such resources to meet the space and objectives of this blawg. I don't try to mislead, but rely on your own judgment of the material.

The Comptroller's Decision and Digest: This is a protest challenging the agency’s evaluation of the protester’s quotation as unacceptable is denied where the agency reasonably found, consistent with the stated evaluation criteria, that one of the protester’s proposed key personnel failed to satisfy the solicitation’s minimum requirements.

The Food and Drug Administration (FDA) issued an RFQ to acquire information technology services of a very particular and special type. Deloitte offered its services. The RFQ included the following evaluation factors, in descending order of importance: technical approach, relevant experience, and price. The RFQ stated that award was to be made to the responsible vendor whose quotation represented the best value to the government, but this case turned on something else, the "technical approach" factor.

The technical approach subfactor required the submission of resumes for qualified key personnel, one of which was an enterprise solutions architect. The RFQ required that the proposed enterprise solutions architect satisfy the following minimum qualifications:

• Possesses extensive knowledge of and hands-on experience with [Oracle] Hyperion or [Oracle Business Intelligence Suite, Enterprise Edition (OBIEE)] or custom applications;
• Minimum Skills/Qualifications: At least 10 years [of] experience in Oracle Enterprise or OBIEE Oracle or Custom applications.
• Has Public Sector experience.

The agency was to evaluate the relevance of each listed key person’s experience, knowledge, certification, and identified skill sets for the ability to successfully complete the activities listed in the statement of work.

Subsequently, the agency amended the RFQ to require offerors to provide a "crosswalk", describing how general experience leads to the specific experience required in the solicitation. Offerors were specifically required to detail in which positions held by the proposed key personnel, did they obtain the required skills, qualifications, and minimum years of experience.

The proposed key person's resume in this instance explicitly stated that the proposed candidate possessed over 20 years of experience using Hyperion and Essbase, which are “core technologies of the Oracle [EPM] that [pre-date] Oracle’s 2007 acquisition of Hyperion and their subsequent rebranding of the software.” The agency didn't disagree with that assessment, but did disagree that Deloitte's proposed architect failed to detail "at least 10 years experience" with the Oracle, Hyperion and custom software required.

The agency contracting officer evaluated the material presented in support of the required experience and concluded that some of the dates listed in the detailed work history overlapped where the proposed candidate worked simultaneously for different employers. To compute the length of experience with Oracle EPM, OBIEE framework, or custom UI applications, the contracting officer eliminated duplicative periods of time for the overlapping and simultaneous employment, and only credited the total time worked with the required systems. The contracting officer’s computation showed that the proposed candidate had a total of 99 months, or 8.25 years, of relevant experience.

The agency then determined that, because the minimum 10 year experience requirement was not met. A quote that fails to conform to a material solicitation requirement is technically unacceptable and cannot form the basis for award. Qualifications for key personnel, specifically where the solicitation requires resumes for key personnel, are material requirements of a solicitation such that an offeror’s failure to propose personnel meeting those requirements would render a proposal unacceptable. The protest was denied.

This case involves the responsiveness of the offer, not the responsibility of the offeror, illustrating distinctively different and often confused fundamental procurement elements. It is not an unreasonable confusion given the way those elements are presented in laws and regulations. For instance, the ABA Model Procurement Code describes responsibility to mean a person who has the capability to perform the contract requirements and provide good faith performance. On the other hand, it defines responsive bidder to mean a person who has submitted a bid which conforms in all material respects to the invitation for bids. At first blush, both of those descriptions could describe the questions presented here. So how do I justify the assertion this case involves responsiveness not responsibility?

The key is in the language used; the artful procurement vocabulary that does not always carry the vernacular connotations of every day speech.

Look at the first sentence used in describing the matter above. It says the protest involves agency "evaluation" of the "unacceptability" of the offer. This is language used to describe responsiveness. The code, and the ABA Model Regulations, require that bids be "evaluated" based on criteria in the solicitation specifications, including criteria used to determine "acceptability". The regulations state, specifically, "any bidder's offering which does not meet the acceptability requirements shall be rejected as nonresponsive". And the nail in the coffin is the statement that qualifications for key personnel, specifically where the solicitation requires resumes for key personnel, are material requirements of a solicitation. As noted above, the definition of responsiveness rests on conformity with material respects of the bid. The language of responsiveness rests on issues of evaluation, unacceptability and materiality.


On the other hand, responsibility is not an objective evaluation of any kind based on criteria in a bid. It is a subjective judgment, based on a weighing of various "standards of responsibility", one of which is the bidder's record satisfactory performance. A determination that a bidder is, in the satisfaction of the Procurement Officer, responsible, and can be made by resort to information extrinsic to the bid submission, at any time up to award or even time of due performance. Responsibility is for practical matters presumed unless the Procurement Officer determines that the bidder is non-responsible.

It can be noted here that questions about the responsiveness or responsibility of bidders are decided at entirely different times and by entirely different standards.

Recalling, in this case, that the offeror was required to substantiate proof of experience in its submission, Cibinic and Nash, in their text, Formation of Government Contracts, Third Edition, also note the confusion that can arise between responsiveness and responsibility.

"When data or information is required to be submitted with the bid, the Comptroller will consider the purpose for which the data of information is to be used when determining whether it is a matter of responsiveness or responsibility. Thus, if descriptive data are to be used to determine a bidder's ability or capacity to perform, the matter will be one of responsibility, and failure to submit the information with the bid will not cause its rejection. (Citations mostly omitted but, noting one particular case where "failure to submit personnel resumes did not render bid nonresponsive".)  On the other hand, information or data may be required to be submitted with the bid for purposes of more precisely determining the nature of the work the bidder is agreeing to accomplish. Such data can be considered to go to the responsiveness of the bid." Id, pp 537-538. (emphasis in original)

Responsiveness, an area in which the contracting officer has limited discretion,deals with the question of whether the contractor has promised to do exactly what the Government has requested. Responsibility, however, involves the question of whether the contractor can or will perform as it has promised, and the contracting officer is accorded a great deal of discretion. Questions of responsiveness are determined only on the basis of information submitted with the bid and on the acts available at the time of bid opening. Conversely, responsibility determinations are made on the basis of information submitted or available up to the time of award. ... As a general rule, matters that deal with bidder responsibility cannot be converted into matters of responsiveness merely by inserting a provision into the IFB requiring rejection of bids that do not comply. Id, p 545. (emphasis in original)

It can be added that a similar analysis is conducted when licenses and permits are required as an element of a solicitation. See Cibinic and Nash, supra, pp 414 et seq.

Of smoke and mirrors; nonresponsibility and invisibility

This post is prompted by a November 2019 GOA report about defense procurement, specifically posing the proposition that "Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership".

In explaining why GAO did the report, it says, "DOD generally accounts for about two-thirds of federal contracting activity. Some companies doing business with DOD may have an opaque ownership structure that conceals other entities or individuals who own, control, or financially benefit from the company. Opaque ownership could be used to facilitate fraud and other unlawful activity." GAO describes "opague" in the context: opaque ownership is a structure of business form or governance that may conceal or obfuscate entities or individuals who own, control, or benefit financially from a business. (See also, e.g., in other contexts, this and this and this.)

The report recalled the impetus for the report came out of "the committee report on the National Defense Authorization Act for fiscal year 2018,[in which] the House Armed Services Committee expressed concerns that DOD contractors may disguise their identities and cost structures from procurement officers, in effect acting as hidden monopolies with unreasonable prices or establishing opaque ownership structures for benefits that are contrary to the government’s interest. The committee report included a provision that GAO examine DOD’s processes to identify contractors’ ownership structures and the risks posed to DOD by contractors with opaque ownership structures. As a general finding in this GAO report, GAO noted, "DOD has also begun a department-wide fraud risk management program, but it has neither assessed risks of contractor ownership across the department nor identified risks posed by contractor ownership as a specific area for assessment."

In undertaking the study leading to this report, GAO "reviewed GAO bid-protest decisions to identify cases in which contractors may have failed to disclose foreign ownership or concealed beneficial-owner information to obtain contracts that they were not eligible to receive"; also studying cases where there appeared "the risk that contractors could be disguising their ownership to create the appearance of competition.

Paraphrasing, GAO explains that real ownership of an entity includes the ostensible ownership disclosed to regulators and the beneficial ownership by the persons who directly or indirectly pull the levers of control and management or reap the substantial rewards of ownership of the entity. The more layers of ownership there are, the difficult it is to determine who really owns the entity. This is compounded by the observation that "In the United States, no centralized information source or national registry maintains company ownership information. In 2014, the National Association of Secretaries of State found that most states collect minimal ownership data. ... During both the entity-formation process and in annual or periodic reporting, the association found that very few states collect some form of entity ownership or control information from limited liability companies or corporations." It conceded that "the Securities and Exchange Commission collects some ownership information on publicly traded companies"; that is, the relatively few, but relatively large, businesses in the USA. The Securities and Exchange Commission collects [only] some ownership information on publicly traded companies.

This limited view from the business world has implications for procurement.

"The FAR contains several provisions governing the selection of an offeror. Provisions such as price and past performance of the offeror are generally applicable in determining which offeror should win a contract. ... A prospective contractor must affirmatively demonstrate its responsibility, including, when necessary, the responsibility of its proposed subcontractors. Contracting officers must then determine the responsibility of prospective contractors, including whether prospective contractors can perform the terms of a contract. To be determined responsible, a prospective contractor must have adequate financial resources to perform the contract (or the ability to obtain them); be able to comply with the required delivery or performance schedule; have a satisfactory performance, integrity, and ethics record; have the necessary organization, experience, accounting and operational controls, and facilities to carry out the contract (or the ability to obtain them); and be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Before awarding a contract over the simplified acquisition threshold, a contracting officer must review the prospective contractor’s performance and integrity information available in the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS is a federal government-wide database designed to assist contracting officers with making a responsibility determination by providing integrity and performance information of covered federal agency contractors and grantees. FAPIIS provides a prospective contractor “Report Card” that includes information pertaining to the prospective contractor’s past performance (if applicable), such as any administrative agreements, contract terminations, nonresponsibility determinations, and exclusions, among other things. It also includes the ability to view the company relationship information, which details the ownership information that prospective contractors are required to report in SAM. [The System for Award Management, or SAM, is a government-wide portal that is consolidating the capabilities of multiple systems and information sources used by the Federal government in conducting acquisitions. In order to contract with the federal government businesses and agencies must complete the required registration with SAM.] When making a responsibility determination, the contracting officer must consider all the information available through FAPIIS with regard to the prospective contractor and any immediate owner, predecessor (an entity that the prospective contractor replaced by acquiring assets and carrying out affairs under a new name), or subsidiary identified for that prospective contractor in FAPIIS. The contracting officer must document in the contract file how the information in FAPIIS was considered in any responsibility determination, as well as the action that was taken as a result of the information.

There is much more to the report, and the need for knowledge about the person or entity with who the government is, or may be, engaging in business. But this post is concentrating on the responsibility factor, and that is only part of the report. I really want to encourage you to read the whole report and how entity information is critical to matters national security and the mitigation of fraud.

GAO notes that, although DOD and other agencies have taken some baby steps to shed light on the issue of contractor ownership (e.g., "DOD, GSA, and the National Aeronautics and Space Administration amended the FAR in May 2014 to require prospective contractors to self-report their immediate and highest-level entity owner, but not their beneficial owner, as part of contractors’ annual registration process in SAM), DOD "faces a number of challenges in identifying and verifying" it. Because "the scope and scale of this activity makes DOD procurement inherently susceptible to fraud", GAO recommended "The Office of the Undersecretary of Defense (Comptroller) should include an assessment of risks related to contractor ownership as part of its ongoing efforts to plan and conduct a department-wide fraud risk assessment."

Guam law follows the ABA Model Procurement Code when it comes to issues of responsibility, which is also the framework of the federal government as described above. I also has a (problematic) requirement (5 GCA § 5233) that, in some procurement methods, a bidder, "as a condition of bidding" must disclose "the name and address of any person who has held more than ten percent (10%) of the outstanding interest or shares of [a] partnership, sole proprietorship or corporation at any time during the twelve (12) month period immediately preceding submission of a bid." The "wild wild West" current darling of business entities is an LLC, but this law, written before Guam adopted an LLC law, does not make any disclosure requirement for that form of entity. Nor does it include trusts within the prophylactic disclosure requirement.

It is interesting to know that trusts have also been used to create invisibility in the procurement context. The following article discussing this issue in light of the trend described in the GAO report above.

Trust but Verify: Disclosure of Trust Ownership May Be Required for Family-Owned Government Contractors

Family-owned businesses are often owned and controlled by family trusts. Trusts are used by families for estate planning, tax planning and asset protection. Family-owned government contractors with trust ownership structures should be mindful of ownership
disclosures required by the Federal Acquisition Regulation (FAR). Failure to comply with the required disclosures could result in False Claims Act or false statement allegations, loss of Facility Security Clearances, rejections of bids and proposals, and loss of bid protests.

Under rules adopted in 2014, a government contractor or offeror owned by another entity must disclose its own Commercial and Government Entity (CAGE) code and the CAGE codes of its “immediate owner” and “highest level owner” both in the System for Award Management (SAM) and to the contracting officer before contract award. Under FAR 52.204-17 (Ownership or Control of Offeror), “immediate owners” and “highest-level owners” are required to obtain their own CAGE codes even if they will not be directly contracting with the government. “Immediate owner” means an entity, other than the offeror, that has direct control of the offeror. “Highest-level owner” means the entity that owns or controls the
immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror. No entity owns or exercises control of the highest-level owner.

If an offeror is owned directly by individuals, the offeror does not have an “immediate owner” or a “highest-level owner.” If an offeror is directly owned by another entity, the ownership entity is the “immediate owner” of the offeror. If an offeror’s immediate owner is, in turn, owned by another entity or series of entities, the last entity at the top of the offeror’s organizational chart is the “highest-level owner.” An offeror is required to certify its ownership disclosures in the “Representations and Certifications” section of its registration on SAM.gov.

The term “entity” is not defined in the FAR, [but is described at the Commercial and Government Entity webpage: "In business, an entity is a person, department, corporation, cooperative, partnership, business, manufacturer, organization, or other groups with whom it is possible to conduct business", and a trust can fall within that description.] The Defense Logistics Agency (DLA), the agency responsible for assigning CAGE codes, suggest that trusts are considered entities under the FAR and should have their own CAGE codes and be disclosed on SAM.gov." Trusts are commonly referenced in state business entity statutes. Trusts also have certain characteristics that are similar to other business entities such as corporations and limited liability companies. Namely, trusts can buy, sell and own personal property and real property; own equity in other business entities; and enter into contracts. Trusts may also shield their beneficiaries from the claims of creditors.

The author of that article warns, "In order to avoid possible False Claims Act or false statement allegations, loss of security clearances, rejections of bids and proposals, and adverse bid protest decisions, family-owned government contractors with trust ownership structures should review their SAM.gov registration to ensure that disclosures about their “immediate owner” and “highest-level owner” are accurate."

The interests of the government, be it state, local or federal, in good governance principles of transparency and responsibility are antithetical to the interests of private sector contractors. There may be some giving and taking, but the government must always heed those principles. History has shown there are many other structures that provide the flexibility commerce requires to carry on,but government, and the broader community must stay vigilant to any "Houdini factor" that jeopardizes the foundation of principles which good governance, and good procurement, that our democratic society depends on.

How do you determine prospective contractor responsibility if you don't know who the contractor really is?

The ABA Model Procurement Code, as do most other procurement regimes, require the government to know who it is doing business with.  "It is important that the bidder of offeror will be a responsible contractor -- that the contractor has the financial ability, resources, skills, capability, and business integrity necessary to perform the contract."  (MPC 3-401, Comment 1)

"The unreasonable failure of a bidder or offeror to promptly supply information in connection with an inquiry with respect to responsibility may be grounds for a determination of nonresponsibility with respect to such bidder or offeror".  (MPC 3-401(1))

Since the time the MPC was enacted in 1979, other laws were being developed to facilitate cloaks of invisibility for entities to hide the identities of the money, ownership, assets and control of  businesses organized under such laws.  The most recent has been the promulgation of a Uniform Limited Liability Company Act (ULLCA) in 1995.  Use of LLCs to provide ownership anonymity of assets, and businesses, is easy (see "How to Hide Ownership of a Company?") and notorious (see, "Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market").  The ULLCA, both in original form and in a revised 2006 Model, has been adopted on Guam and many U.S states.

This is becoming a problem, both in the U.S. and Europe, and presumably elsewhere, as indicated in the following article published by the Association of Certified Financial Crime Specialists (ACFCS):

Report roundup: EU calls U.S. a ‘secrecy haven,’ GAO highlights commercial owner opacity, and more, posted March 16, 2017.

This week’s Report Roundup has a common theme running through hundreds of pages of reports: the risk of opaque ownership structures and how, in the United States and beyond, the inability for countries to collect beneficial ownership information is a magnet for bad actors.

In the U.S., that means a major ally in the European Union (EU) calling out a longstanding gap in the country’s anti-money laundering (AML) defenses: the federal government allowing certain states like Delaware to sell corporate secrecy as a service – an ultimate irony as this country aggressively chases and chastises other jurisdictions for doing the same thing, according to the report.

That vulnerability is made doubly dangerous when it intersects the international trading sector due to the knowledge that organized criminal groups, corrupt kleptocrats and terror financiers currently hide, funnel and legitimize trillions of dollars in illicit gains, per estimates, through a myriad of trade trickery, including under and over-invoicing items, falsifying documents and other tactics.

In that same vein, U.S. government watchdog group the Government Accountability Office (GAO) noted in a report that because this country doesn’t broadly require ownership information to be made available, that can open the door to national security risks when government operations are housed in buildings owned by foreign entities who may or may not be a shell for prying, spying eyes bent on espionage.

Lastly, another report by United Nations Security Council highlighted that the issue of anonymous shell companies globally allows rogue regimes like North Korea to flout international sanctions and get access, as analysts prognosticate, to banned technology and weapons systems on its path to wreak worldwide havoc by creating weapons of mass destruction.

The article goes on to elaborate on some of those reports.

It is interesting that the article mentioned a report by the U.S. Government Accountability Office (GAO), being critical of lack of ownership information in the national security context, because the GAO has now, again, turned its eyes to the subject, in the context of procurement, in its November 2019 report below.  In its letter to Congress transmitting the report, it noted, 

DOD awards contracts to companies in the private sector to provide a wide variety of services for U.S. military forces. Of the thousands of contractors doing business with DOD, some companies are what are known as shell companies — that is, companies that exist but conduct either no business or minimal business. Shell companies can be used for legitimate purposes; for example, they may be formed to obtain financing before starting operations. However, companies sometimes use shell companies to form opaque ownership structures designed to disguise the beneficial owner — the natural person or persons who directly or indirectly own and control, or receive substantial economic benefit from, a company.

These opaque ownership structures can be used to facilitate fraud and other unlawful activity in commerce, including contracts with DOD. For this report, we define opaque ownership as structures of business governance that may conceal or obfuscate entities or individuals who own, control, or benefit financially from a business.

Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership  (some excerpts of the letter an other parts of the report, sliced and diced to meet the didactic goal and limited space of this blog; you should read the whole report for original meaning and intent):  In the letter mentioned above, it further noted:

We researched legal databases and news articles involving DOD contractors to identify federal court cases and agency decisions. We reviewed GAO bid-protest decisions to identify cases in which contractors may have failed to disclose foreign ownership or concealed beneficial-owner information to obtain contracts that they were not eligible to receive.  We examined known risks identified through our case-study research and interviews with DOD officials.  We further examined the risk that contractors could be disguising their ownership to create the appearance of competition.

We contacted several government contractors’ associations to gain members’ perspectives on reporting beneficial ownership information and received feedback from 16 members of three government contractors’ associations. The perspectives gained from our queries are not generalizable to all contractors.

In the body of the report, GAO found:  

As the number of layers of ownership increases, ownership information becomes more opaque. This opacity can make it difficult for DOD to determine which entities and individuals ultimately own or control its contractors.

In the United States, no centralized information source or national registry maintains company ownership information. In 2014, the National Association of Secretaries of State found that most states collect minimal ownership data. The association reviewed key information collected by the 50 states and the District of Columbia during the entity-formation process and in annual or periodic reports. During both the entity-formation process and in annual or periodic reporting, the association found that very few states collect some form of entity ownership or control information from limited liability companies or corporations.  The Securities and Exchange Commission collects some ownership information on publicly traded companies. Any person or group of persons that acquires beneficial ownership of more than 5 percent of a publicly traded company’s registered voting securities must register.

GSA’s System for Award Management (SAM) is a federal government-wide database for vendor data that is used across all federal agencies. Any entity that wishes to do business with the government must register in SAM to be eligible to receive a contract award, except in specific circumstances. To increase procurement transparency and traceability, entities that wish to do business with the federal government are now required to provide additional ownership information through the annual registration process in SAM. The required ownership information includes the “immediate” and “highest” level ownership of an offeror.

Responsibility Determination

Contract award decisions are based on evaluation factors and significant subfactors that are tailored to the procurement, at the discretion of procurement officials. At a minimum, these factors must include: price/cost, quality, and past performance. A prospective contractor must affirmatively demonstrate its responsibility, including, when necessary, the responsibility of its proposed subcontractors. Contracting officers must then determine the responsibility of prospective contractors, including whether prospective contractors can perform the terms of a contract. To be determined responsible, a prospective contractor must have adequate financial resources to perform the contract (or the ability to obtain them); be able to comply with the required delivery or performance schedule; have a satisfactory performance, integrity, and ethics record; have the necessary organization, experience, accounting and operational controls, and facilities to carry out the contract (or the ability to obtain them); and be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Before awarding a contract over the simplified acquisition threshold, a contracting officer must review the prospective contractor’s performance and integrity information available in the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS is a federal government-wide database designed to assist contracting officers with making a responsibility determination by providing integrity and performance information of covered federal agency contractors and grantees. FAPIIS provides a prospective contractor “Report Card” that includes information pertaining to the prospective contractor’s past performance (if applicable), such as any administrative agreements, contract terminations, nonresponsibility determinations, and exclusions, among other things. It also includes the ability to view the company relationship information, which details the ownership information that prospective contractors are required to report in SAM. When making a responsibility determination, the contracting officer must consider all the information available through FAPIIS with regard to the prospective contractor and any immediate owner, predecessor (an entity that the prospective contractor replaced by acquiring assets and carrying out affairs under a new name), or subsidiary identified for that prospective contractor in FAPIIS. The contracting officer must document in the contract file how the information in FAPIIS was considered in any responsibility determination, as well as the action that was taken as a result of the information.

Contractors with Opaque Ownership Pose Financial Fraud Risks Including Price Inflation

Concealing relationship with subcontractor to inflate prices. Contractors can subcontract with companies they own or control to inflate prices for financial benefit. For example, in one case the contractor purchased goods from a company that its owners created, controlled, and used to make fraudulent markups appear legitimate. Contractors or subcontractors can also bill for work not performed by creating fictitious invoices that add costs to a contract. For example, in four court cases we examined, multiple DOD subcontractors were actually shell companies that did not have the inventory they purported to ultimately provide to the government or perform the work indicated in the contract requirements. Contractors or subcontractors can conceal conflicts of interest for financial benefits. For instance, in one case a DOD contractor employee and his spouse formed a company and concealed their interests by not listing their names but listing the names of family members on formation documents. This company became a subcontractor to the company that employed the DOD contractor. The contractor employee, in his official position, wrote letters justifying awards of purchase orders to the subcontractor he owned and approving recommendations that the awards be made to the subcontractor. The co-owner of the subcontractor concealed her involvement by signing contracts using a different name. We also identified the potential risk of companies creating the appearance of competition by submitting bids from fictitious companies. We identified one case that involved a DOD contractor whose executives admitted as part of their plea agreements to creating fictitious, inflated bids that were not from actual businesses to ensure that the contractor’s own bid would be selected by DOD as the supposed lowest.

Contractors with Opaque Ownership Can Also Pose Nonfinancial Fraud Risks

Contractors can pose nonfinancial fraud risks to DOD by concealing their ownership structure to bid on and obtain contracts that they are not eligible to receive. These nonfinancial risks may not pose a direct financial cost to DOD, but they can allow ineligible companies to contract with DOD while potentially denying eligible companies from contracting with DOD. These risks can also lead to additional vulnerabilities. One contractor that fraudulently obtained set-aside contracts claimed it was owned by a service-disabled veteran; however, that veteran had virtually no involvement with the contractor. Some contractors have been found not eligible to receive the set-aside contracts because they were not at least 51 percent controlled by the eligible individuals and the eligible individuals did not make long-term decisions for the companies. Rather, the contractors were controlled by an ineligible individual who owned and controlled a separate company that actually performed work on the set-aside contracts.

Contractors with opaque ownership structures can also pose the risk of circumventing eligibility requirements for contracts that are only designated for domestic companies, which can lead to other vulnerabilities that affect warfighter readiness. We identified four cases in which individuals created domestic shell companies for foreign manufacturers and bid on contracts designated for domestic companies. In three of the four cases, the individuals behind the shell companies also had ownership interests in the foreign manufacturing companies. Foreign manufacturers received payments from the contracts, despite the contracts only allowing domestic manufacturers to be eligible, and one such manufacturer ultimately supplied DOD with defective and nonconforming parts that led to the grounding of at least 47 fighter aircraft.

I'm sure you get the drift here. There's much more in the GAO report, much more. Have a look. Of particular importance is the lengthy discussion of things that are needed to improve the system of contractor selection. In brief, in its conclusions, the report summarizes,

We recognize that collecting additional ownership information, including beneficial-ownership information, could pose compliance burdens for contractors; and regulatory trends have generally focused on easing the burden to do business. Additionally, verifying contractor ownership can be challenging and time-consuming. Nevertheless, having a thorough assessment of contractor-ownership risks will better position DOD to make informed decisions on how best to use its resources and help ensure that the department’s fraud risk management program is organized and targeted to manage risks in a prioritized manner.

POST SCRIPT: In another new development along the lines of tracking who is whom, note the following article reprinted in Lexology:

Government Contractors Beware: DOJ Announces Creation of Interagency Procurement Collusion Strike Force

On November 5th, the Department of Justice (“DOJ”) Antitrust Division doubled down and announced the formal launch of the Procurement Collusion Strike Force (“PCSF”), an interagency partnership consisting of prosecutors and investigators focused on deterring, detecting, investigating, and prosecuting antitrust crimes, such as bid-rigging conspiracies and related fraudulent schemes in government procurement, grant, and program funding.

Oops -- My mistake

This article comes from Athol, Maine, and is a perfect textbook hypothetical procurement quiz question, played out in real life. It involves a bid error, and seeks to find a way to deal with it. The facts of mistake are always at the core of a problem such as this. But the clarity of the law would help its resolution.

I've set out the whole article as presented, but for our purposes, let's just pretend it is a test question. How would you analyze the problem and solution?

State AG’s office denies Kenefick bid protest

The attorney general has denied a protest by Kenefick Corp., which submitted the low bid to the town for the Queen Lake Dam rehabilitation project. Bids were opened Jan. 31, and the hearing was held March 9.

Kenefick’s bid of $268,150 was the lowest of the 11 bids received, but the town rejected it because the document was not properly filled out. Kenefick argued that the $60,435 error on the form was obvious and should have been corrected by the town.

On the form, Kenefick wrote the total bid price was $268,150. There was a unit price schedule attached to the form. Bidders were asked to provide a unit price for approximately 20 items. The bidders were expected to multiply each unit price by the estimated quantity to derive a total bid amount. Bidders were further instructed to write the extended price for each item in words.

Instead of listing the extended price for each item in words, Kenefick expressed its unit prices in words. The total of the amounts in written words equaled $207,715, which conflicted with the total bid price of $268,150. The town said it made Kenefick’s bid obscure, mandating the rejection.

In the town’s rules relating to bids, in case of a discrepancy between words and figures, the amount expressed in words governs.

Kenefick was notified that its bid read as $207,715. Project Engineer David Lenart told the selectmen this week that, “Kenefick was told to take the bid for the lower amount, or withdraw it. He filed a protest.”

Kenefick maintained the error was obvious, and the town should have corrected it.

The town argued that Kenefick’s bid was obscure because of its $60,435 discrepancy, and also that Kenefick is not a responsible bidder, because it does not have experience with three dam projects, which was called for by the bid specifications.

The company’s lack of experience was also a concern, the town said. Lenart said, “Kenefick could only come up with two projects, which were not comparable” to the scope of the work needed on the Queen Lake project.

State Assistant Attorney General Deborah A. Anderson wrote that the town was under no obligation to correct Kenefick’s bid price, noting if a bidder’s error makes the price or scope of work ambiguous, the bid must be rejected. She further stated the town did not abuse its discretion by failing to correct Kenefick’s error.

Anderson ruled, “I find that Kenefick’s error was an obvious one, even though Kenefick’s bid price could be read as either $207,715 or $268,150. The town had the discretion to correct this error, but it chose not to do so. This was not an arbitrary decision.’

Anderson said as protestor, Kenefick did not meet its burden to prove that its rejection was arbitrary. She said the town was rightfully concerned about allowing Kenefick to choose which bid price was the correct price, thus giving Kenefick ”two bites of the apple.” Also, she said the town followed its own rule. For those reasons the protest was denied.

The second-lowest bidder, R. Bates & Sons, who bid $270,540, made similar, though fewer, errors on the bid forms. He was informed of the same issue.

Selectmen signed two documents prepared by the town’s attorney, officially rejecting the Kenefick and Bates bids. Selectmen then voted to award the bid to the third lowest bidder, Edward Page Corp., which came in at $319,069 ($50,919 higher than the Kenefick bid).

Chairman Thomas Brouillet and John Telepciak signed the contract saying Page “did everything right, and has good experience.”

The project involves the demolition of the dam’s existing spillway and outlet conduit, and construction of a new concrete spillway and gate structure, outlet gates, trash racks, low level outlet pipe, riprap slope protection, gravel crest and landscaping.

Representing the town at the Boston hearing were Thomas McEnaney (town counsel) who filed a response to Kenefick’s protest, and David Lenart, the project engineer.

Work on the dam will begin after Labor Day.

So, what happened here? Kenefick presented a bid with itemized unit prices. In accordance with bid requirements, Kenfeck's bid amount was provided for each itemized line item, but was spelled out in word form. The total amount of all bids was then provided, in Arabic numerals.

Setting aside the question of Kenefick's responsibility for the moment, because the article makes it look like its bid was rejected on grounds of responsiveness, not responsibility, its bid was rejected because the bid "was obscure because of its $60,435 discrepancy" between the total bid price and the mathematical total of the itemized prices. Kenefick argued it was an obvious mistake, but the State Assistant Attorney General held that the town was under no obligation to correct the bid, on the ground that, if a bidder's error makes the price ambiguous, the bid must be rejected. She said the town did not abuse its discretion by failing to correct Kenefick's error.

That may well be the applicable law in Athol, which evidently has a rule that, "in case of a discrepancy between words and figures, the amount expressed in words governs." But this blog is about the ABA Model Procurement Code, and more particularly the Guam procurement law, which follows the ABA MPC, and there is no such law in that context. Remember, we are treating this article as a hypothetical factual situation for our analysis purposes.

MPC § 3-202(6) states that "correction ... of inadvertently erroneous bids before or after award ... shall be permitted in accordance with regulations. This is the same language in Guam law, 5 GCA § 5211(f).

The pertinent ABA MPC regulation is in R3-202.11 ("Mistakes in Bids"), in particular R3-202.11.4(b)("Mistakes where intended correct bid is evident"), which states, "if the mistake and the intended correct bid is clearly evident on the face of the bid document, the bid shall be corrected to the intended correct bid and may not be withdrawn. Examples of mistakes that may be clearly evident on the face of the bid document are ... errors in extending unit prices, ... and arithmetical errors." 

It might be the case that the town did not consider this to be a "clearly evident" mistake. But the AAG was certain it was a clearly evident mistake: "I find that Kenefick’s error was an obvious one...."

The AAG also said "the town was rightfully concerned about allowing Kenefick to choose which bid price was the correct price, thus giving Kenefick 'two bites of the apple'.” Again, I do not question the AAG's statement of applicable Maine law. But the "two bite at the apple" old saw is irrelevant in the MPC regulation, which says such a mistaken bid "shall be corrected ... and may not be withdrawn.

Moreover, there is another element here. Both bites of Kenefick's bid were the lowest prices bid. "Kenefick’s bid price could be read as either $207,715 or $268,150." The next lowest bid, at $270,540, was higher than both of those bids, if we assume, for argument, they were intended to be two separate bids. Even if the totaled low bid written in words,$207,715, the total bid expressed in Arabic numerals, $268,150, remained the low bid. For some reason, “Kenefick was told to take the bid for the lower amount, or withdraw it. He filed a protest."

I hope that there was a stronger reason to reject the bid because of issues of responsibility, though there is not much in this article that would help an analysis of that issue. This bid was rejected before it was evaluated from all appearances, even though it was the lowest bid. It was reported only that "Kenefick is not a responsible bidder, because it does not have experience with three dam projects, which was called for by the bid specifications." 

In the ABA MPC regulations (R3-401.10), it is not necessary to actually have all the experience at the time of bid if it can be obtained (R3-401.03) after bid evaluation, for instance by subcontractors or other professionals available for hire. This regulation requires a separate inquiry to determine responsibility after bid opening, so long as the low bidder's responsibility is determined to the satisfaction of the procurement officer before award (R3-401.04). There was evidently here no finding that Kenefick was nonresponsible (see, R3-401.05), merely "a concern".

And what did the town get from this? The obligation to pay $50,000 more for the next available bid, about 20% more than Kenefick's stated total bid.

It might be asked, why is the ABA MPC so lenient on allowing low bidders to correct bids? It would seem, unless the low bidder has determined to be nonresponsible, that government should be allowed the opportunity to take a low bid, notwithstanding technical mistakes in it that do not prejudice the competitive standing of other bidders. Here, correction of the bid, even to the higher amount, would not improve the competitive position of any of the other bidders.  

It is one of the foundation purposes and policies of the MPC, and Guam's procurement law, "to maximize to the fullest extent practicable the purchasing value of public funds". (MPC § 1-101(2)(f); 5 GCA § 5001(b)(5).)  It is mandated that the procurement law is to be construed and applied to promote its purposes and policies.  (MPC § 1-101(1); 5 GCA § 5001(a).)

An army of one can get government contract

FEMA Contract Called for 30 Million Meals for Puerto Ricans. 50,000 Were Delivered.

For this huge task, FEMA tapped Tiffany Brown, an Atlanta entrepreneur with no experience in large-scale disaster relief and at least five canceled government contracts in her past. FEMA awarded her $156 million for the job, and Ms. Brown, who is the sole owner and employee of her company, Tribute Contracting LLC, set out to find some help.

Ms. Brown, who is adept at navigating the federal contracting system, hired a wedding caterer in Atlanta with a staff of 11 to freeze-dry wild mushrooms and rice, chicken and rice, and vegetable soup. She found a nonprofit in Texas that had shipped food aid overseas and domestically, including to a Houston food bank after Hurricane Harvey.

By the time 18.5 million meals were due, Tribute had delivered only 50,000. And FEMA inspectors discovered a problem: The food had been packaged separately from the pouches used to heat them. FEMA’s solicitation required “self-heating meals.” “Do not ship another meal. Your contract is terminated,” Carolyn Ward, the FEMA contracting officer who handled Tribute’s agreement, wrote to Ms. Brown in an email dated Oct. 19 that Ms. Brown provided to The New York Times. “This is a logistical nightmare.”

Ms. Brown described herself in an interview as a government contractor — “almost like a broker,” she said — who does not keep employees or specialize in any field but is able to procure subcontracted work as needed, and get a cut of the money along the way. She claims a fashion line and has several self-published books, and describes herself on Twitter as “A Diva, Mogul, Author, Idealist with scars to prove it.”

After Tribute’s failure to provide the meals became clear, FEMA formally terminated the contract for cause, citing Tribute’s late delivery of approved meals. Ms. Brown is disputing the termination. On Dec. 22, she filed an appeal, arguing that the real reason FEMA canceled her contract was because the meals were packed separately from the heating pouches, not because of their late delivery. Ms. Brown claims the agency did not specify that the meals and heaters had to be together.

Tribute has been awarded dozens of government contracts since 2013, including one in 2015 for $1.2 million in mattresses for the Defense Logistics Agency, which supports military combat troops, federal spending databases show. Tribute delivered the mattresses, according to the agency. The databases offer only a fragmented picture of federal contracts. The government has also canceled Tribute contracts on at least five occasions.

Four cancellations involved the Federal Prison System, which found that Tribute failed to deliver meat, bakery, cereal and other food products to various correctional institutions. A fifth termination involved the Government Publishing Office, which terminated a contract for 3,000 tote bags after Tribute failed to print the Marine Corps logo on both sides of the bags.

An investigation by the office’s inspector general found that Tribute “altered and submitted a false shipping document and subcontracted the predominant production function on two contracts without proper authorization,” according to a 2015 report submitted to Congress. The report did not name Tribute, but a Government Publishing Office spokesman confirmed that it was the Georgia company mentioned in the document. The office awarded Tribute 14 contracts totaling more than $80,000 from 2014-15, and the company “routinely delivered late,” the report said.

As a result of the botched tote-bag job, the Government Publishing Office prohibited the award of any contracts over $35,000 to Tribute until January 2019. But that exclusion applied only to that office, not to any other federal agency.

Tribute has had three indefinite contracts with FEMA for hygiene kits since 2013, but none of them have been activated.

Asked about the cancellations, Ms. Brown offered explanations for each case, including that she had supplier trouble with the prison meals. She could have fought the Government Publishing Office on the tote bags contract, she said, but could not afford to at the time.

The bid protest could slow down the Pentagon’s cloud acquisition effort.

A $7 million sole-source cloud support contract awarded by the Defense Department to a company with one employee in January has come under bid protest.

Interoperability Clearinghouse filed the protest with the Government Accountability Office on Feb. 5, and contends the Defense Department failed to conduct a reasonable responsibility determination of Eagle Harbor Solutions LLC’s capabilities and resources. Eagle Harbor Solutions is an Alaska Native-owned 8(a) small disadvantaged business that federal contracting database records indicate has an annual revenue of $91,005, a single employee and few past government contracts.

The protest also alleges a conflict of interest due to Eagle Harbor Solutions being a subsidiary of Koniag Government Services and its parent company, Koniag Inc., which provides cloud services to the Defense Department through the Army’s ACCENT contract. A $7 million sole-source cloud support contract awarded by the Defense Department to a company with one employee in January has come under bid protest.

Interoperability Clearinghouse filed the protest with the Government Accountability Office on Feb. 5, and contends the Defense Department failed to conduct a reasonable responsibility determination of Eagle Harbor Solutions LLC’s capabilities and resources. Eagle Harbor Solutions is an Alaska Native-owned 8(a) small disadvantaged business that federal contracting database records indicate has an annual revenue of $91,005, a single employee and few past government contracts.

The protest also alleges a conflict of interest due to Eagle Harbor Solutions being a subsidiary of Koniag Government Services and its parent company, Koniag Inc., which provides cloud services to the Defense Department through the Army’s ACCENT contract.

The Defense Department previously said the contract “is for program office support services,” and that Eagle Harbor Solutions “is serving in a support capacity only by providing a small team of highly skilled individuals.” In a press release, Eagle Harbor Solutions said it would provide the Defense Department “a full range of infrastructure engineering, software engineering, acquisition, strategic communications, business operations, cost estimation, and budgetary expertise.”

The Defense Department previously said the contract “is for program office support services,” and that Eagle Harbor Solutions “is serving in a support capacity only by providing a small team of highly skilled individuals.” In a press release, Eagle Harbor Solutions said it would provide the Defense Department “a full range of infrastructure engineering, software engineering, acquisition, strategic communications, business operations, cost estimation, and budgetary expertise.”

How can these contracts possibly be justified? Bid contracts are awarded (or meant to be) to the lowest priced responsive bid of a responsible bidder. A bidder who offers a product or service conforming materially to all solicitation requirements can, with a low bid, be considered to have presented a responsive bid.

But that is only half the story. The bidder must also be responsible.  Responsibility and responsive are not at all the same thing.  They are often, wrongly, conflated.  See, Responsivebility.

How can a small shop win a contract for a complex job?

Responsibility is a matter of judgment, involving the weighed consideration of several factors, which the ABA Model Procurement Code calls "Standards of Responsibility". A bidder's responsibility is to be determined before award, and is most often not considered until after bids are opened.

The standards include, a satisfactory record of performance. That is only useful if governments keep such records and share them amongst its various arms. The record can include non-government contract, particularly important for new entrants to the field of competition. Similarly a satisfactory record of integrity is a factor.

And this is where it gets a bit non-intuitive to the uninitiated. Although a bidder is required to have "available the appropriate financial, material, equipment, facility, and personnel resources and expertise" to indicate its capability to meet all contractual requirements, it is also deemed responsible if the bidder has "the ability to obtain them". There are some organizations who have become very adept at understanding a new opportunity and marshaling the stuff necessary to perform the job. These bidders can also win a government contract.

Another example of such a case is provided by the Hawaiian case, BROWNING-FERRIS INDUSTRIES OF HAWAll, INC. It was an administrative hearing before the Department of Commerce and Consumer Affairs of the State of Hawaii. It involved an award to provide rubbish collection services at the Honolulu airport. It did not have trucks, containers, personnel, drivers, collection facility or practically anything else, but did show, to the satisfaction of the Procurement Officer, that it had the ability to obtain all of it. 

Note that, in the Eagle Harbor situation, there was an additional element: whether the bidder was a bona fide, qualified Alaska Native-owned 8(a) small disadvantaged business, or whether it was a front for its much larger owner, which provided the resources it lacked.

An irresponsible determination of nonresponsibility?

Baltimore painting company sues Delaware River Port Authority over Commodore Barry Bridge bid contract

A Baltimore company has initiated legal action in a New Jersey federal court, claiming they were passed over by the Delaware River Port Authority of Pennsylvania and New Jersey (DRPA) as the lowest bidder for a $17 million contract to paint the Commodore Barry Bridge. According to a lawsuit filed by The Alpha Painting & Construction Company, Inc., DRPA “wrongfully deemed the lowest bidder ‘not responsible’ and is in the process of awarding the [bridge painting] contract to a higher bidder.”

On May 5, the DRPA first put out invitations for bids to paint the Pennsylvania Approach Spans of the Commodore Barry Bridge, which allows for travel over the Delaware River from Bridgeport, N.J. to Chester, Penn. Alpha submitted a bid for this project on June 16 in the amount of $17,886,000, which conformed to the project’s bid specifications and rendered it the lowest bidder for the project, according to the lawsuit. DRPA decided to award the bid contract to Corcon, Inc. – whose original bid clocked in at a price roughly $10.2 million more than Alpha’s.

Amy L. Ash, Acting Manager of Contract Administration for DRPA, declared that DRPA had conducted an ‘investigation’ of Alpha’s bid and found that Alpha had ‘not submitted an OSHA Form 300 or otherwise detailed workplace incidents over the past three years and the applicable Experience Modification Factors,” according to Alpha’s lawsuit.


Alpha claimed DRPA “willfully ignored the merits of the low bidder’s protest, and refused to hold a hearing on the disputed factual issues regarding this procurement, despite multiple requests to conduct such a hearing.” Alpha alleged DRPA declared Alpha ‘not responsible’ for failure to supply the documents, and rejected Alpha’s bid. The Aug. 4 Denial Letter noted that through the course of DRPA’s ‘investigation,’ it had allegedly ‘contacted Alpha’s insurance broker, Beverly Annunziatta of HMS Insurance Associates, Inc., on July 8, 2016’ and ‘offered Ms. Annunziatta an opportunity to supplement the accident experience information attached to Alpha’s bid submission, but she did not do so,” per the lawsuit.

Alpha disagreed with this contention, saying it had provided said information and pointed out DRPA never revealed what constituted its “investigation” of the bid, nor contacted it regarding any such investigation in the first place. When Alpha protested this result, the company says DRPA “denied it a hearing to resolve the outstanding factual discrepancies. DRPA contended, “DRPA was not required to make its responsibility determination within 10 business days, nor is DRPA required to hold a hearing in the event of a protest of that determination. Accordingly, Alpha’s request for a hearing is denied.”

Now, I have taken these bits and pieces from the article, paraphrased and probably distorted them to create a hypothetical case for consideration of how one might view this situation from the standpoint of Guam's procurement law, which is heavily filtered through the provisions of the ABA Model Procurement Code.

In this context: Would Alpha have the right to protest the rejection of the bid on the ground that the bidder was determined to be non-responsible? Clearly, yes.

The ABA Model Code allows any bidder who may be aggrieved to file a protest, and that protest, if not resolved mutually before adversarial processes begin, would be entitled to a hearing administratively, followed by judicial review as a matter of right. (See for starters ABA MPC §9-101, Guam 5 GCA § 5425)

But was Alpha properly determined to be non-responsible? That is a question of judgment, ultimately, and the person making that judgment is generally give a lot of latitude in making the judgment call. That said, the process of coming to that judgment must be fair and equitable under basic principles of procurement. (See ABA MPC § 1-101 and Guam 5 GCA § 5001, as well as 5 GCA § 5003: "This Chapter requires all parties involved in the negotiation, performance, or administration of territorial contracts to act in good faith.")

Under the ABA MPC and Guam's version of it, a determination of responsibility contemplates that the contract officer will conduct an inquiry. "The unreasonable failure of a bidder or offeror to promptly supply information in connection with an inquiry with respect to responsibility may be grounds for a determination of nonresponsibility...." Also the implementing regulations of both codes describe one of the many standards of responsibility as whether the prospective bidder has "supplied all necessary information in connection with the inquiry concerning responsibility".

Recognizing that the article above likely is not a true and completely accurate statement of facts in this case, but sticking to the hypothetical theme here, the only inquiry conducted was not with the bidder, but rather with a third party, and the question asked of that third party hardly fully answered the question whether Alpha's "satisfactory record of performance" was adequate.  Particularly when it is understood that even if there were some OSHA claims made as confirmed by the insurance broker, there is no indication of the severity, quantity or other circumstances of the claims. Thus, it would appear that the judgment of nonresponsibility was made without any reasonable basis or any effective inquiry.

If you have any interest in the real story and the other issues raised in it, read it at the link above.

Unusual confluence of 3 separate GAO protests, all involving one contractor

You can View Recent Bid Protest Decisions of the GAO on its website. My recent visit to the site came up with the unusual coincidence of three separate protests, each involving one contractor, SupplyCore Inc. 

As always in the blawg, do not rely on the rendition of the cited piece presented; read the full piece at the link provided, to keep me honest, first of all, and to learn more than what is presented, secondly, including internal citations. I cut, rearrange, paraphrase and generally conduct mayhem with the material to suit my own purpose in presenting a view point for a teachable moment; for right or wrong.

Matter of: SupplyCore Inc., File: B-409418.4; B-409418.5; B-409418.6, April 16, 2015

DIGEST: Protest challenging the agency’s decision to cancel a solicitation is denied where the agency reasonably concluded that continued in-house performance would result in cost savings and efficiencies.

DECISION: SupplyCore Inc., of Rockford, Illinois, protests the Defense Logistics Agency’s (DLA) cancellation of request for proposals (RFP) No. SPM7LX-14-R-0029, for supply chain integration and management of lead-acid batteries. SupplyCore contends that DLA’s decision to cancel the solicitation was unreasonable. We deny the protest.

DLA issued the RFP with the intent of eliminating and reducing its current inventory of lead-acid batteries through attrition, and transfer of the responsibility for supply chain management functions such as forecasting, acquisition, storage, distribution, and transportation to a supply chain integrator. The RFP solicited proposals for a supply chain integrator to manage and perform all responsibilities required under the supply chain for worldwide support of current and future Department of Defense lead-acid batteries customers.

Based upon the agency’s evaluation of the offerors’ final proposal revisions, the SSAC and the contracting officer unanimously recommended the award of a contract to an offeror other than SupplyCore. Thereafter, the agency sent the presumptive awardee’s price information to a DLA business analyst to conduct an acquisition business case analysis (BCA) in accordance with DLA procedures. The final analysis found that it would cost the agency $13.8 million more to award a contract as compared to keeping the requirement in house. DLA also requested a BCA be performed by a private firm, which used a proprietary methodology distinct from the VSRM model used by DLA. The private firm’s BCA found an approximately $7 million cost of awarding the contract, as compared to continuing in-house performance, after accounting for transportation and contract costs. Thereafter, the agency determined that it would cancel the solicitation.

SupplyCore challenges the agency’s decision to cancel the procurement. The protester contends that the agency’s rationale for cancelling the RFP is pretextual because DLA does not want to award it a contract. SupplyCore alleges that the cancellation is unreasonable because the final BCA was based on faulty information and improper assumptions. Based upon our review of the record, we find that the agency’s cancellation was reasonable.[5]

As a general rule, our Office does not review agency decisions to cancel procurements and instead perform the work in-house, since such decisions are a matter of executive branch policy. However, where, as here, a protester argues that the agency’s rationale for cancellation is but a pretext -- that the agency’s actual motivation is to avoid awarding a contract -- we will examine the reasonableness of the agency’s actions in cancelling the procurement.

The protester makes three primary assertions in support of its allegation: the BCA improperly relied upon the price of the presumptive awardee, instead of SupplyCore’s lower-priced proposal; the BCA unreasonably assumed a 10‑percent decrease in demand; and the BCA failed to consider that the contract would be awarded on a fixed-price basis without an economic price adjustment, while the agency’s costs of in-house performance are not fixed. SupplyCore contends that these flaws led the agency to skew its cost analysis in favor of in‑house performance.

With regard to SupplyCore’s first assertion -- that it was unreasonable for the BCA to use the presumptive awardee’s price, while there may have been other methodologies the agency could have chosen to calculate costs for its final BCA, had the final BCA recommendation used the lowest-priced offer instead of the best-value offeror as the protester argues, such analysis would have been of little value to the agency given the solicitation’s best‑value award criteria, which placed significantly more importance on the non‑price factors. We find nothing unreasonable about the agency’s decision.

With regard to SupplyCore’s challenge to the agency’s assumed decrease in demand, we likewise find the agency’s evaluation unobjectionable. In this regard, the agency states that offerors were provided with demand history and briefing charts from an industry day, which showed declining demands and divestiture schedules. The agency also explains that its BCA included a sensitivity analysis that covered a range of demand scenarios, including a 10-percent increase in demand, which demonstrates that a savings would not be realized even if the BCA assumption of a 10-percent reduction was removed.

Finally, we also find unpersuasive SupplyCore’s argument that the final BCA did not consider differences between the fixed-price nature of the contract and in-house performance costs that would not be fixed. In fact, the BCA cost analysis summary clearly notes that the absence of an economic price adjustment in the fixed-price contract is “a further cost benefit” of contract award.

Matter of: Al Raha Group for Technical Services, Inc.; Logistics Management International, Inc., File: B-411015.2; B-411015.3, April 22, 2015

DIGEST: 1. Protests challenging the agency’s evaluation of the awardee’s past performance are sustained where the record shows that the evaluation was inconsistent with the terms of the solicitation and not adequately documented.

2. Protests challenging the agency’s evaluation of the protesters’ past performance are sustained in part, where the record shows that, for one protester, the agency unreasonably failed to consider information verifying the protester’s claimed past performance, and where the agency did not have a reasonable basis to discount positive past performance references.

DECISION: Al Raha Group for Technical Services, Inc. (RGTS), of Riyadh, Saudi Arabia, and Logistics Management International, Inc. (LMI), of Eastman, Georgia, protest the award of a Foreign Military Sales contract to SupplyCore, Inc., of Rockford, Illinois, by the United States Air Force under request for proposals (RFP) No. FA8505‑13‑R-31138, for F‑15 fighter jet transportation support services (TSS) for the Royal Saudi Air Force (RSAF). RGTS and LMI challenge the agency’s evaluation of the offerors’ past performance, and LMI challenges the agency’s tradeoff determination. We sustain the protests in part, and deny them in part.

The RFP sought proposals for comprehensive fleet management for various special-purpose vehicles and trailers to support base stand-ups and continued RSAF operation of F-15s. The contractor will provide all transportation and support services required to source, procure, track, warehouse, and deliver assets needed within the Kingdom of Saudi Arabia to support RSAF F-15 operations.

For purposes of award, the Air Force was to evaluate proposals under the following three factors: technical; past performance; and cost/price. With regard to past performance, the Air Force was to assess an offeror’s ability to successfully accomplish the proposed effort based on its demonstrated present and past work record. In addition to the present/past performance FACTS sheets prepared by offerors for four past performance references and the associated past performance questionnaires (PPQ) obtained by offerors, the agency also expressly reserved the right to obtain performance information from other sources. The RFP further provided that the agency was to evaluate the number and severity of performance problems, the appropriateness and effectiveness of corrective actions taken, and the overall work record; the solicitation warned that prompt corrective action in isolated instances might not outweigh overall negative performance trends.

The RFP advised offerors that the Air Force would evaluate the recency and relevance of each past performance reference. Recency was defined as active or completed efforts performed within the past 5 years from the issuance date of the RFP. For purposes of evaluating relevance, the RFP provided that the Air Force would evaluate the scope, magnitude of effort, and complexities for each reference. The RFP provided that the evaluation would include logistical and programmatic considerations, including but not limited to, the quantity procured, length of effort, complexity of the required delivery timeline, and dollar values of efforts submitted. The relevance rating was dependent on the degree to which the past performance references reflected similar scope, magnitude of effort, and complexities as compared to the solicitation’s requirements. For example, if the submitted contract met essentially the same technical complexities, but involved only some of the programmatic and logistical scope and magnitude of effort, a lesser relevancy rating was to be assigned.

the Air Force was also to evaluate whether an offeror’s past performance references demonstrated experience with the following: (1) foreign military sales or direct commercial sales material procurement; (2) procurement negotiations; (3) electronic asset visibility tracking and reporting; (4) subcontractor management; (5) international teaming agreements and/or international operations management; (6) packing, handling, shipping, and transportation management; and (7) quality assurance management. The RFP stated that the relevance rating for each reference would be based on the scope, magnitude, and complexity of the effort, and whether the reference demonstrated experience in the seven enumerated areas of experience.

Under the technical factor, the Air Force was to evaluate an offeror’s proposal for acceptability--essentially, a pass/fail evaluation. Among the technically acceptable proposals, the Air Force was then to make a best value tradeoff between past performance and cost/price, wherein past performance was to be significantly more important than cost/price.

After evaluating the recency, relevance, and quality of an offeror’s past performance, the Air Force was to assign an overall past performance confidence assessment using the following ratings: Substantial Confidence, Satisfactory Confidence, Limited Confidence, No Confidence, and Unknown Confidence (Neutral). The following matrix was established:

The Source Selection Authority (SSA) determined that SupplyCore’s proposal, based on its “Substantial” confidence past performance assessment, warranted paying a price premium of 4.18 percent over LMI’s proposal and 2.15 percent over RGTS’s proposal, both of which received “Limited” confidence assessments. Based on the tradeoff, the SSA determined that SupplyCore’s proposal offered the best value to the government, and selected the proposal for award.

 RGTS and LMI both challenge the Air Force’s evaluation of SupplyCore’s past performance as warranting a “substantial confidence” assessment, and each separately challenges the agency’s evaluation of its past performance as warranting a “limited confidence” assessment.

As a general matter, the evaluation of an offeror’s past performance is within the discretion of the contracting agency, and we will not substitute our judgment for reasonably based past performance ratings.   However, we will question an agency’s evaluation conclusions where they are unreasonable or undocumented.  The critical question is whether the evaluation was conducted fairly, reasonably, and in accordance with the solicitation’s evaluation scheme.  Here, we find that the agency’s evaluation with respect to SupplyCore’s and LMI’s past performance was unreasonable, inconsistent with the terms of the RFP, and not adequately documented and sustain these protest arguments.  We find that the agency’s evaluation with respect to RGTS’s past performance was reasonable and in accordance with the terms of the RFP and deny these protest arguments.

As discussed above, our Office will question an agency’s past performance evaluation where the record indicates that the agency either failed to evaluate, or otherwise unreasonably considered, the relevance of past performance references in accordance with the solicitation’s stated evaluation criteria. As relevant here, an agency’s evaluation of an offeror’s past performance is unreasonable where the solicitation requires the agency to consider the value of the offerors’ references as compared to the value of the solicited requirement, and the agency fails to reasonably explain why comparatively small-value references provide a basis to justify a high past performance rating, or in this case the highest possible rating.

Additionally, where an agency fails to document or retain evaluation materials, it bears the risk that there may not be an adequate supporting rationale in the record for us to conclude that the agency had a reasonable basis for its source selection decision.

 In sum, based on the fact that SupplyCore’s past performance submitted for evaluation was with respect to references that were small fractions of the size of the effort required by the RFP and the Air Force’s reliance on other past performance information did not adequately evaluate relevance pursuant to the RFP’s applicable criteria, the agency’s decision to assign SupplyCore the highest past performance confidence assessment of “substantial confidence” is not supported by the record.

Notwithstanding that the past performance information claimed for LMI’s CEO was verified by knowledgeable agency officials in the written PPQs,  the Air Force effectively elected to “verify” the verification set forth in the PPQs by seeking further information from the subsequent program manager.  That individual, who was not the program manager for two of the three cited references, could not verify certain aspects of the LMI CEO’s performance. The agency, however, has failed to advance any reasonable explanation for how the subsequent program manager’s inability to verify the LMI CEO’s performance negates the verification provided by knowledgeable agency officials in the PPQs.   We have held that an agency is required to consider PPQs in its possession.  The agency’s wholesale discounting of the verification provided by the PPQs, on the basis that it could not confirm LMI’s past performance information through yet an additional source, was unreasonable.  As a consequence, the Air Force failed to meaningfully consider available agency information regarding LMI’s past performance of similar requirements for the Air Force, and therefore we sustain the protest on this basis.

 In summary, we find that the Air Force’s evaluation of SupplyCore’s past performance was inconsistent with the relevancy requirements of the RFP and not adequately documented. Because the reevaluation of SupplyCore’s past performance could result in a new rating for that offeror, which could in turn require a new source selection decision, we conclude that RGTS and LMI, both of whom submitted lower-priced offers, were prejudiced by this error.  We also find that the agency unreasonably failed to consider information regarding LMI’s past performance on similar efforts for the agency, and that the protester was also prejudiced by this error.

We recommend that the Air Force, consistent with our decision, reevaluate offerors’ past performance information. Based on that reevaluation, we recommend that the agency make a new source selection determination. We also recommend that the agency reimburse the protesters their respective costs associated with filing and pursuing their protests, including reasonable attorneys’ fees.

[Note:  there is a considerable amount of fact and application of particular elements of the RFP requirements that is analyzed to reach the decision made.  You have to look to the source cited above to read it.]

Matter of: Dalma Tech2 Company, B-411015, April 22, 2015

DIGEST: 1. Protest challenging the agency’s evaluation of the awardee’s proposal as technically acceptable is denied where the agency’s evaluation was reasonable and consistent with the terms of the solicitation.

2. Protest challenging the agency’s evaluation of the awardee’s past performance is denied where the evaluation was reasonable and consistent with the terms of the solicitation.

DECISION: Dalma Tech2 Company (DTC), of Riyadh, Saudi Arabia, protests the award under request for proposals for F‑15 fighter jet transportation support services (TSS) for the Royal Saudi Air Force (RSAF). DTC challenges the agency’s determination that SupplyCore’s proposal was technically acceptable, and the agency’s evaluation of DTC’s past performance. We deny the protest.

DTC challenges the Air Force’s determination that SupplyCore’s proposal was technically acceptable, arguing that SupplyCore failed to meet In-Kingdom licensing and facility requirements. The protester also challenges the agency’s evaluation of its past performance as warranting only a “satisfactory confidence” assessment. For the reasons that follow, we find that none of DTC’s challenges provides a basis to sustain the protest.

DTC alleges that SupplyCore cannot satisfy the RFP’s requirement to present a valid Saudi Arabian business license because SupplyCore is not a registered company or legally affiliated with an agent, distributor, joint venture partner, or teaming partner under Saudi Arabian law. See Protest at 2; Comments at 2.

Ordinarily, a solicitation requirement for a contractor to warrant that it possesses, or will otherwise obtain prior to performance, licenses required to conduct business in a foreign country is a matter concerning a contractor’s responsibility. In most cases, responsibility is determined based on standards set forth in Federal Acquisition Regulation (FAR) § 9.104-1, and involves subjective business judgments that are within the broad discretion of the contracting activities. Our Office generally will not consider a protest challenging an agency’s affirmative determination of an offeror’s responsibility.

Here, however, the Performance Work Statement in the RFP (PWS) explicitly required that offerors “include [a] copy of [an] actual Saudi business license” with their In-Kingdom Execution Plans, effectively imposing what amounted to a “definitive responsibility” criterion. Definitive responsibility criteria are specific and objective standards designed to measure a prospective contractor’s ability to perform the contract. Such criteria, which must be met as a precondition to award, limit the class of contractors to those meeting specified qualitative and quantitative qualifications necessary for adequate performance, e.g., unusual expertise or specialized facilities. Where an agency includes a definitive responsibility criterion in a solicitation, we will review the record to ascertain whether evidence of compliance has been submitted from which the contracting officer reasonably could conclude that the criterion has been met; generally, a contracting agency has broad discretion in determining whether offerors meet definitive responsibility criteria since the agency must bear the burden of any difficulties experienced in obtaining the required performance.

Based on our review of the record, we find nothing objectionable about the Air Force’s determination that SupplyCore met the RFP’s licensing requirement. The RFP did not require that the offeror itself have a Saudi Arabian business license. Rather, the RFP specifically contemplated that an offeror could satisfy the licensing requirement by maintaining a sponsorship or teaming effort with a Saudi Arabian company. SupplyCore’s proposal states that the awardee’s proposed subcontractor, Arwadh Establishment, is a Saudi Arabian company licensed in accordance with applicable Saudi law. SupplyCore’s proposal included copies of Arwadh’s business licenses. Id. The Air Force found that Arwadh will conduct the In-Kingdom TSS requirements, and the SupplyCore team will utilize Arwadh’s stand-alone In-Kingdom Operations department to ensure that the company maintains and adheres to the local laws and customs for Saudi Arabia and to ensure that foreign personnel maintain a legal work status. Thus, the agency reasonably concluded that SupplyCore demonstrated compliance with the RFP’s licensing requirement through its teaming arrangement with a licensed, Saudi Arabian company.

To the extent DTC argues that the teaming agreement between the awardee and its subcontractor is inconsistent with Saudi Arabian law, the protester’s argument is misplaced. Our focus is limited to whether SupplyCore met the eligibility requirements under the terms of the RFP. In this regard, the RFP did not require offerors to demonstrate that their proposed teaming approaches were approved under Saudi Arabian law; rather, the RFP required evidence of an “actual Saudi business license,” which, as noted above, SupplyCore provided through its subcontractor, Arwadh. Under these circumstances, we find that the Air Force reasonably found that SupplyCore satisfied the RFP’s licensing requirement.

Apples don't fall far from the tree

Mexico awards road project to sons of banned contractor (Read the whole story at the link.)

Mexico has awarded a $75mn highway contract to a company closely linked to a contractor that was banned from government work after botching two projects, including a job on the same highway.

Mexico’s Federal Audit Office in 2012 found that Gutsa bungled a $30mn Pemex contract to build a monument to mark the bicentennial of Mexican independence. Gutsa did not finish the monument, known as the Estela de Luz, in time for the anniversary, and the costs ballooned to more than $90mn, the office found. Investigators later found that Gutsa won the monument contract by taking advantage of a regulatory loophole. The company received that contract while it was appealing a previous ban over shoddy work on the Mexico City-Acapulco highway.

Epccor is owned by the sons of Juan Diego Gutierrez Cortina, who controls a company that is on the government’s list of banned businesses. Among the ties between the two companies, one of the sons serves as a director of both firms, a public filing shows. Epccor itself hasn’t been banned.

Gutsa and Epccor “are completely different companies,” said Epccor vice president Adolfo Gomez. He said Gutsa was a major construction firm with many employees, and it is only natural that some should have joined Epccor. Gomez himself once worked at Gutsa.

One of Gutierrez Cortina’s sons, Ignacio Gutierrez Sainz, is a director of both Epccor and Gutsa, according to a public financial document from last year. Gutierrez Sainz and two of Gutierrez Cortina’s other sons are shareholders in Epccor.
Epccor has shared an office address and a legal representative with Gutsa, according to documents reviewed by Reuters. Six Epccor employees on the website LinkedIn list Gutsa as their previous employer.

A Reuters investigation earlier this year found Gutierrez Cortina’s company, Gutsa Infraestructura, is among dozens of contractors that have won work with state oil company Pemex even after being barred from contracting by the public administration ministry. Some banned companies have changed their names and shareholders in order to win new contracts.

Mexican law prohibits government entities from contracting with companies that have shareholders directly or indirectly in common with banned contractors. A spokesman for the transport ministry said it does not sign contracts with banned companies.

Mexico’s public administration ministry, which maintains the list of banned contractors, said in a written statement that an independent auditor oversaw the bid process for the Cuernavaca bypass. The independent auditor who reviewed the highway contract recently won by Epccor did not find any irregularities in the process of awarding the deal. But he warned the transport ministry of potential problems, noting that there was confusion in the contract proposal over the degree to which the road was to be widened.

“This bid process is happening without the certainty that it can be completed in the time and within the originally considered budget,” he added.

This case does not illustrate a conflict of interest, as that is defined in the usual US law. See, Organizational Conflicts of Interest: A Growing Integrity Challenge.

Rather, this illustrates the requirement that a government should not do business with a non-responsible contractor. See, Agility Defense & Government Services v. U.S. Department of Defense, No. 13-10757 (11th Cir. Dec. 31, 2013); also, GAO Decision in Matter of: USS Chartering, LLC, B-407601 January 15, 2013.

Stefani Bonato provides a useful discussion of this topic in Death by Affiliation: The FAR Reach of Suspension and Debarment.