Proposed Legislation to Penalize Pentagon Contractors That Game the Bid Protest System

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This is a guest post by Sandra I. Erwin of National Defense Magazine, originally printed on June 6, 2016.

One of the legislative proposals the Senate will debate this week would penalize Pentagon contractors that game the bid protest system.

The language adopted by the Senate Armed Services Committee in its version of the fiscal year 2017 National Defense Authorization Act reflects longstanding grievances about the impact of contractor protests on defense procurements. The reforms specifically take aim at frivolous contractor protests. They would punish incumbent contractors that challenge the government after losing a bid knowing that they can hold on to the job until the protest is settled. The provisions also would restack the deck in favor of small businesses, which for years have complained that the bid protest system is weighed in favor of companies that can afford to wait months or years for disputes to be resolved.

The issue could become contentious during the NDAA conference later this year when the Senate and House meet to iron out differences between their respective bills. The House chose to not immediately shake up the protest system, and instead requires the secretary of defense to do an in-depth review of the process and report back.

The current system that allows losing contractors to appeal decisions to the Government Accountability Office was intended to create a level playing field. But the Senate Armed Services Committee believes the system has been abused. As it has done in many other areas of policy, what Congress giveth, it also can taketh away.

It is widely recognized that the protest system has become counterproductive, said Arnold Punaro, CEO of The Punaro Group, retired Marine Corps major general and a former staff director of the Senate Armed Services Committee. “We need to reform the protest process,” Punaro told National Defense. “The process stymies acquisition decisions. Like lots of other things, it was a good idea when it started.”

There are legitimate reasons to file protests, especially big-ticket weapon contracts that can make or break a company’s future, Punaro said. But protests today are so pervasive that they are used to stall even relatively small “task orders,” he said. “I know companies that have been in protests for three years. We need a course correction.”

When awards are protested and projects are put on hold, “it is very hard on small businesses,” said Punaro. “You win something and you may have to wait three years to find out if you won.” Oftentimes decisions to challenge awards are made by incumbent companies’ chief financial officers who may favor “dragging things out and get revenues” for however long the dispute goes on. The point of protests is to make sure the government makes a fair and objective decision, Punaro noted, but the system has spiraled out of control.

Contractors in the services sector are known to “protest for profits,” said Donald J. Wetekam, retired Air Force lieutenant general and senior vice president of AAR Corp. The company provides aviation maintenance services and logistics support. Contracts in this sector tend to be long-term deals so incumbents have a lot at stake every time the contract is recompeted, Wetekam said June 3 at a Lexington Institute forum on Capitol Hill. “What we see today is that the system incentivizes losing incumbents to protest,” he said. “You can extend your contract by a minimum of 100 days, more likely six months.”

Most companies do not protest frivolously, Wetekam cautioned. “There are, however, irresponsible contractors particularly in the services sector, and the system is structured to essentially support that.” The Senate Armed Services Committee’s language is a “small step in the right direction,” he said. “I’m happy to see that. We need more aggressive action. The system rewards bad behavior. It’s a problem.”

Section 821 of the SASC bill makes an incumbent contractor forfeit any profit or fee earned from a bridge contract awarded because of delays caused by the incumbent’s protest, if the protest is unsuccessful. Incumbents would “have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from the filing of such protest,” the bill stated.

The withholdings would be returned to the incumbent contractor only if the “subject of the protest is canceled and no subsequent request for proposal is released or planned for release,” or GAO “issues an opinion that upholds any of the protest grounds filed under the protest.” Otherwise, the withheld payments would go either to GAO or the contractor that was awarded the contract before the protest.

These provisions raise many red flags, noted contracting attorneys Patrick Stanton and Hunter Bennett, of the Washington, D.C. law firm Covington and Burling. It is not clear what happens, for example, when the incumbent is one of several competitors to file a protest.

“Additionally, if it is clear that a contracting agency is taking corrective action as a result of a flaw raised by the incumbent protest, why should the contractor forfeit the withheld payments simply because GAO did not have the opportunity to issue an opinion upholding the protest?” the lawyers ask. “This question is particularly relevant in light of GAO’s 2015 bid protest statistics indicating that, although GAO sustains just 12 percent of all protests, the bid protest effectiveness rate, which includes protests in which the agency takes voluntary corrective action, is a lofty 45 percent.”

Stanton and Bennett wonder whether these provisions “simply go too far. “Clearly aimed at curbing the practice of incumbent contractors filing meritless protests simply to extend performance through bridge contracts, the bill as written would almost certainly have a chilling effect on meritorious bid protests as well,” they write in a blogpost.

The House version of the NDAA has no such provisions. It only instructs the secretary of defense to conduct a review of defense contract bid protests, including an evaluation of protests filed by incumbents.

Congress formalized the role of the GAO as a protest forum in the Competition in Contracting Act of 1984 although GAO has served in that role for 90 years and is the only administrative institution with the authority to hear protests across the federal government. The Court of Federal Claims is the only judicial forum for hearing protests.

Defense contractors have mixed opinions on the NDAA proposals. Large firms have argued that, as much as everyone dislikes the bid protest, it’s the only legal mechanism in place to ensure a fair contracting award process. In these times of fewer big-ticket weapon awards, shareholders expect companies to fight tooth and nail. Small businesses, for their part, would welcome the SASC reforms as a needed rebalancing of a system that penalizes contractors that don’t have the cash flow to stay afloat during protracted contract appeals.

Despite concerns about the impact of protests on Pentagon programs, contracting data does not reveal an epidemic of protesting. Congressional Research Service defense acquisition specialist Moshe Schwartz noted in a July 2015 report that protests have received increased congressional scrutiny. Both the House- and Senate-passed versions of the 2016 National Defense Authorization Act called for a report on the bid protest process.

“Analysts believe that protests are sometimes the result of poor communication between government and industry, poorly written requirements, and agencies not adequately debriefing losing bidders after an award. When agencies do not adequately debrief bidders, companies may file a protest to determine why they lost a competition,” CRS said. “DoD contracts are less likely to be protested, and when protested, less likely to be sustained than civilian agency contracts. Protests against civilian agencies are also growing at a faster rate than protests against DoD.”

There is a strong chance that the full Senate will support the SASC provisions on contractor protests. Analysts won’t predict how the Senate and House would compromise on an issue where they are far apart. According to Punaro, “We can expect there will be negotiations.” Procurement measures in the NDAA will not be among the most contentious. The chambers are deeply at odds over bigger issues such as Pentagon topline spending levels and requiring women to register for the draft.

This article previously appeared in the National Defense Industrial Association’s National Defense Magazine at http://www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=2209, and was reprinted with permission.


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