BNUMBER: B-272174; B-272177
DATE: October 2, 1996
TITLE: PI Construction Company
**********************************************************************
Matter of:PI Construction Company
File: B-272174; B-272177
Date:October 2, 1996
Paralee White, Esq., and Joseph A. Zillo, Esq., Cohen & White, for the
protester.
David R. Kohler, Esq., Small Business Administration, Marian E.
Sullivan, Esq., Department of the Air Force, and Maj. Michael J.
O'Farrell, Jr., Department of the Army, for the agencies.
Linda S. Lebowitz, Esq., and Michael R. Golden, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Small Business Administration failed to follow its published
regulatory implementation of the statutory requirement that 8(a)
construction contracts be awarded to 8(a) concerns located within the
county or state where the work will be performed by imposing
geographic restrictions linking the eligibility of an 8(a) concern to
compete for such contracts with the location at which the 8(a) concern
maintains its principal place of business, as opposed to a branch
office.
DECISION
PI Construction Company protests as unduly restrictive of competition
the geographic restriction contained in request for proposals (RFP)
No. F04626-96-R-0105, issued by Travis Air Force Base, Department of
the Air Force, in California, and RFP No. DABT31-96-R-0003, issued by
Fort Leonard Wood, Department of the Army, in Missouri.
We sustain the protests.
The RFPs were issued by the Air Force and Army as competitive small
disadvantaged business set-asides under section 8(a) of the Small
Business Act, 15 U.S.C. sec. 637(a) (1994), for construction
requirements. In accepting the respective Air Force and Army
requirements for competition in the 8(a) program, the SBA directed
that competition under the Air Force procurement be limited to 8(a)
concerns serviced by eight SBA District Offices and one SBA Branch
Office in Arizona, California, Nevada, and Hawaii (SBA Region IX), and
that competition under the Army procurement be limited to 8(a)
concerns serviced by two SBA District Offices in Missouri (SBA Region
VII). The SBA stated that "[a]ll other firms [would be] deemed
ineligible to submit offers." In accordance with the SBA's direction,
the Air Force and Army included the specified geographic restrictions
in the synopses published in the Commerce Business Daily.
The protester, an 8(a) concern with its principal place of business in
Denver, Colorado, but which also maintains a branch office with at
least one full-time employee in the appropriate geographic areas in
California and Missouri, recognizes that the Small Business Act, 15
U.S.C. sec. 637(a)(11), requires "[t]o the maximum extent practicable"
that 8(a) construction contracts "be awarded within the county or
State where the work is to be performed." In this regard, the
protester does not question the regulatory authority of the SBA to
impose geographic restrictions for construction requirements.
However, the protester argues that the SBA's regulatory implementation
of this statutory provision provides no basis for the SBA to restrict
8(a) competitions for construction requirements according to an 8(a)
concern's principal place of business, defined at 13 C.F.R. sec. 124.100
(1996) as "the location at which the business records of the [8(a)]
concern are maintained and the location at which the individual who
manages the concern's day-to-day operations spends the majority of
his/her working hours."
In this regard, the protester points out that in June 1995, the SBA
promulgated new regulations governing the 8(a) program. These
regulations provide as follows:
"Construction competitions. Where a construction requirement
offered to the 8(a) program exceeds the $3 million
competitive threshold, SBA will determine, based on its
knowledge of the 8(a) portfolio, whether the competition
should be limited only to those Program Participants located
within the geographical boundaries of one or more SBA district
offices, an entire SBA regional office, or adjacent SBA
regional offices. Only those Participants located within the
appropriate geographical boundaries are eligible to submit
offers." 13 C.F.R. sec. 124.311(g)(3). (Emphasis added.)
The SBA does not define in its new regulations the basis upon which an
8(a) program participant would be considered "located within the
appropriate geographical boundaries" in order to be deemed eligible to
compete.[1]
The protester also references the SBA's preamble to its regulations,
as published in the Federal Register, 60 Fed. Reg. 29,969, 29,971
(June 7, 1995), which addresses the statutory requirement that 8(a)
construction contracts be awarded to 8(a) concerns located within the
county or state where the work will be performed. The SBA explained
in its preamble that competition for 8(a) construction requirements
would be limited:
"to those Program Participants within the geographical
boundaries of one or more SBA district offices. SBA believes
that a Program Participant may be considered as being located
within a geographical boundary if it regularly maintains an
office which employs at least one full-time individual within
that geographical boundary." (Emphasis added.)
In light of the SBA's statement in its preamble, the protester
contends that regardless of the fact that it maintains its principal
place of business in Colorado, it should be considered eligible to
compete under each of the referenced 8(a) solicitations since it
regularly maintains a branch office with at least one full-time
employee within the appropriate geographic areas in California and
Missouri, as designated by the SBA.
The SBA responds that while it announced a "general statement of
policy" in the preamble, specifically, that "it might in appropriate
cases apply a less restrictive definition of the term 'located within
the geographic boundaries'" to include 8(a) concerns which regularly
maintain an office with at least one full-time employee within a
designated geographic area, it is not required to use this "more
expansive" definition in all cases and will do so in its discretion
when practicable or when necessary to provide developmental assistance
to 8(a) concerns unable to effectively compete on a national basis.
Section 8(a) of the Small Business Act, 15 U.S.C. sec. 637(a), authorizes
the SBA to enter into contracts with government agencies and to
arrange for performance through subcontracts with socially and
economically disadvantaged small business concerns; Federal
Acquisition Regulation sec. 19.805 (FAC 90-8) and 13 C.F.R. sec. 124.311
provide for and govern competitively awarded contracts set aside for
section 8(a) qualified concerns. Because of the broad discretion
afforded to the SBA and the contracting agencies under the applicable
statute and regulations, our review of actions under the section 8(a)
program is generally limited to determining whether government
officials have violated applicable regulations or engaged in bad
faith. See Bid Protest Regulations, 4 C.F.R. sec. 21.5(b)(3) (1996).
Here, we conclude that the SBA's decision to link the eligibility of
an 8(a) concern to compete for 8(a) construction contracts to the
geographic location where the 8(a) concern maintains its principal
place of business, as opposed to a branch office, is not consistent
with the SBA's published regulatory implementation of the statutory
requirement that such contracts be awarded within the county or state
where the work will be performed. Moreover, subsequent internal
agency action by the SBA regarding its published regulatory
implementation was inconsistent with the notice and comment
requirements of the Administrative Procedure Act (APA), 5 U.S.C. sec.
553, as adopted by the SBA at 13 C.F.R. sec. 101.108.
There is no question that the SBA has authority to impose geographic
restrictions in furtherance of its program needs. See, e.g., Border
Maintenance Serv., Inc., 72 Comp. Gen. 101 (1993), 93-1 CPD para. 97,
recon. denied, 72 Comp. Gen. 265 (1993), 93-1 CPD para. 473. Here, the
SBA, at 13 C.F.R. sec. 124.311(g)(3), simply provides that only 8(a)
program participants "located within the appropriate geographical
boundaries" are eligible to compete for 8(a) construction contracts.
In its regulations the SBA does not define this phrase or otherwise
place 8(a) concerns on notice that in certain circumstances, as a
prerequisite to competing for these contracts, an 8(a) concern may be
required to maintain its principal place of business, as opposed to a
branch office, in the designated geographic areas where the work will
be performed. However, the SBA clearly states in its regulatory
preamble that an 8(a) concern "may be considered as being located
within a geographical boundary if it regularly maintains an office
which employs at least one full-time individual within that
geographical boundary." Although the SBA characterizes the
definitional language in its preamble as a non-binding, discretionary
statement of policy which essentially can be ignored in light of its
use of the term "may," we do not agree.
The preamble to a regulation should be considered in construing and in
determining the meaning of the regulation. See Wiggins Bros., Inc. v.
Dep't of Energy, 667 F.2d 77 (Temp. Emer. Ct. App. 1981). Under
federal rules of construction of legislative regulations, definitions
in a preamble may not be ignored. Id. While the term "may" in a
regulation is generally construed as permissive, rather than
mandatory, the construction of such term--whether discretionary or
mandatory--is reached in each case on the context of the regulation
and on whether it is fairly to be presumed that it was the intention
of the agency to confer discretion or to impose an imperative
requirement. See United Hosp. Center, Inc. v. Richardson, 757 F.2d
1445 (4th Cir. 1985). Courts have often interpreted "may" as
connoting a mandatory meaning. Id.
Despite the SBA's use of the term "may," we conclude that the
structure and the context of the regulatory preamble sentence at issue
is one of definition, not one creating discretion. This sentence
begins with a declaratory phrase, "SBA believes that," followed by the
SBA actually defining those 8(a) concerns which it believes are
located within a designated geographic area, specifically, not only
8(a) concerns headquartered in these areas, but also 8(a) concerns
with branch offices in these areas.[2] This preamble language fills
the definitional void in the regulations themselves, and it is the
preamble which reflects the SBA's intent regarding the basis for a
determination of the eligibility of an 8(a) concern to compete for
8(a) construction requirements. We believe the SBA has provided no
persuasive reason to ignore the definition in its preamble which
supports the protester's position that because it maintains a branch
office in each of the designated geographic areas, it should be
considered eligible to compete under the referenced 8(a)
solicitations.
Moreover, subsequent internal agency action by the SBA belies its
position that it has discretion to ignore the definition of the phrase
"located within the appropriate geographical boundaries," as provided
in its regulatory preamble. In this regard, on August 7, 1995, just 2
months after the effective date of the SBA's new regulations governing
the 8(a) program, the SBA issued an internal agency procedural notice
stating that:
"[t]he SBA published a final rule in the Federal Register on
June 7, 1995, that contained two sentences that should not
have appeared. A correction to the June 7, 1995, final rule
will be published to delete the following sentences: 'SBA
believes that a Program Participant may be considered as being
located within a geographical boundary if it regularly
maintains an office which employs at least one full-time
individual within that geographical boundary.'" (Emphasis
added.)[3]
The SBA reports that its original inclusion of the preamble language
under discussion was "inadvertent," and it has not yet issued a
subsequent Federal Register notice deleting this language. The SBA
explains that it has:
"decided to see whether the subject language [in the preamble]
could help it achieve its objective of promoting sufficient
competition to assure adequate performance at a fair price
within those local buy areas where SBA would otherwise
increase the size of the local buy area.
"The Agency has not yet completed its examination of that
question. If the language has no substantial affect on our
ability to insure sufficient competition to assure adequate
performance at a fair price within local buy areas, or if the
administration of the program with this language in it becomes
excessively burdensome or confusing, it is likely that SBA
will rescind the language. If, on the other hand, SBA finds
that the language stimulates competition and enhances the
quality of 8(a) performance in local areas, SBA will likely
retain the language."
The SBA's internal implementation of a change to a published
regulatory definition which impacts the basis upon which the SBA
determines the eligibility of 8(a) concerns to compete for 8(a)
construction requirements is inconsistent with the SBA's commitment to
follow the public notice and comment procedures of the APA. In this
regard, the SBA states that it "will follow the public participation
requirements of the [APA], 5 U.S.C. sec. 553, in rulemakings relating to
public property, loans, grants, benefits, or contracts." 13 C.F.R. sec.
101.108. Public participation requirements include notice and comment
procedures. See Analysas Corp. v. Bowles, 827 F. Supp. 20 (D. D.C.
1993) (SBA did not justify its failure to comply with the notice and
comment requirements of the APA). In other words, absent prior public
notice, we do not think that 8(a) concerns, like the protester, could
reasonably expect based on the SBA's published regulatory
implementation that the SBA would be deciding on a
solicitation-by-solicitation basis whether 8(a) concerns with branch
offices only in the designated geographic areas would be considered
eligible to compete for 8(a) construction requirements.
While we recognize that the SBA has discretion to promulgate a
different, less expansive definition of the phrase "located within the
appropriate geographical boundaries," even placing 8(a) concerns on
notice that if the SBA determines that an appropriate level of
competition exists in a designated geographic area, a prerequisite to
competing may be a requirement that the 8(a) concern be headquartered
in this area, we conclude that such a change in the published
regulatory implementation must be accomplished not internally, but
rather in accordance with the public rulemaking requirements of the
APA, as adopted by the SBA at 13 C.F.R. sec. 101.108.
For the reasons discussed, and by letter of today to the Administrator
of the SBA, we are recommending, based on the SBA's published
regulatory implementation, that the SBA afford the protester and other
8(a) concerns similarly situated, that is, those having branch offices
as opposed to principal places of business in the designated
geographic areas, an opportunity to compete under each of the
referenced 8(a) solicitations. The SBA should advise the Air Force
and Army to amend the basis for competition for the respective
requirements. We also recommend that the SBA reimburse the protester
for the costs of filing and pursuing its protests, including
reasonable attorneys' fees.[4] 4 C.F.R. sec. 21.8(d).
The protests are sustained.
Comptroller General
of the United States
1. The SBA defines a "[p]rogram [p]articipant" as "a small business
concern participating in the [8(a) Program]." 13 C.F.R. sec. 124.100. A
program participant is serviced "in the field office serving the
territory in which the concern's principal place of business, as
defined in [13 C.F.R.] sec. 124.100, is located." 13 C.F.R. sec. 124.203.
2. In this sentence, the word "believes," not "may," is the operative
verb.
3. The second sentence to be deleted addresses the award of sole
source 8(a) construction contracts based on the same branch office
geographic restriction.
4. In its report filed in response to each of these protests, the SBA
expressly states that the geographic restrictions in the referenced
solicitations are the SBA's, not the Air Force's or Army's.