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February 05, 2019 - Protests & Litigation, Compliance, Mergers & Acquisitions

In Wyle, the GAO Gives Another Reminder of Risks Associated with Pending Procurements During a Transaction

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Although there are often significant rewards associated with transactions among government contractors, the transactions require careful planning and coordination.  Even then, there is a fair amount of risk during the process: the novation process (when required) is discretionary; the seller may have undisclosed violations of procurement law; organizational conflicts of interests may preclude the buyer from pursuing work; etc.  We previously wrote about corporate transactions as bases for protest in our Post-Award Protest Primer.  The recent GAO decision in Wyle Labs reminds us that there is also a risk to pending and future procurements.  In Wyle, GAO held that the agency could reasonably eliminate Wyle Labs from a procurement when, because of a pending novation, the entity actually proposed to perform was its subcontractor (and prospective buyer of its OASIS contract), Grant Thornton.

Wyle Laboratories entered into an asset purchase agreement (APA) with Grant Thornton June 5, 2018, for the sale of all assets required to perform Wyle’s GSA OASIS contract.  On June 14, 2018, as part of the sale, Wyle requested novation of its OASIS contract to Grant Thornton.  GSA, however, took its time responding, meaning that Wyle was still the holder of its OASIS contract when the June 28, 2018 deadline for an OASIS order to be issued by Department of Homeland Security was approaching.  Pursuant to its obligations under the APA, Wyle submitted a proposal, designating Grant Thornton as its subcontractor doing 100% of the work.  Wyle also submitted a pre-award protest arguing that the solicitation’s terms were unduly restrictive of competition because past performance evaluation was limited only to the prime, and should include subcontractors (here, Grant Thornton).  (We discussed the pre-award protest in our September 2018 Bid Protest Roundup).  The GAO dismissed the pre-award protest because Wyle failed to demonstrate an economic interest.  During the protest, Wyle admitted that Grant Thornton wrote the quote and would perform the work.

The agency noted the facts that came out during the pre-award protest and the pre-award protest decision in its evaluation of Wyle’s quote.  Although Wyle’s quote was technically excellent, the agency found considerable risk in the fact that the agency would not be in privity of contract with the entity actually performing.  Although Wyle and Grant Thornton were completely transparent about the process, and the fact that Grant Thornton would lead the work, their quote was found ineligible for award.  GAO upheld this decision, finding that the agency acted reasonably.

Wyle appears to have been attempting to utilize some lessons learned from a prior protest it filed against Science Applications International Corporation (SAIC); instead it was hoisted on its own petard.  Wyle had previously protested the award of a NASA contract to SAIC because the proposal did not reflect the way the contract would be performed.  Wyle Laboratories, Inc., B-‑408112.2, Dec. 27, 2013, 2014 CPD ¶ 16.  (See our earlier write-up on Wyle in our Post-Award Protest Primer #18).  In that case, SAIC was in the middle of a restructuring when the proposal was pending and had offered a rate cap to the agency to mitigate the risk to direct and indirect rates.  The Contracting Officer, however, rejected the rate cap.  In its decision, the GAO held that, because the proposal reflected the abilities of “old” SAIC and the offeror/awardee did not intend to perform on the contract, the agency acted unreasonably in awarding to SAIC.

Here, Wyle attempted to avoid that result: the information of the sale was in the quote and the transaction occurred before quotes were due – the GSA had simply been slow in providing the novation.  Even so, the agency balked at the risk of a prime contractor that would not actually be doing the work.  There was really nothing more Wyle and Grant Thornton could have done to mitigate the risk.  Even finalizing the APA at a different time likely would have led merely to another procurement being pending.

Takeaway: Contractors should be aware of the risks to pending procurements when conducting a transaction and should, to the extent possible choreograph timing around major potential procurements.  Although contractors should be open and candid with contracting officers about pending deals and attempt to assure them that the performance is not at risk, the risk remains that an agency will disagree and choose not to award a contract until the transaction, including novation, is complete.  The silver lining to this case is that the GAO has not yet found it unreasonable that an agency allow a contractor, such as Wyle, to win the award.