TITLE: B-299072, Hydroid LLC, January 31, 2007
BNUMBER: B-299072
DATE: January 31, 2007
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B-299072, Hydroid LLC, January 31, 2007

   Decision

   Matter of: Hydroid LLC

   File: B-299072

   Date: January 31, 2007

   Charles R. Marvin, Jr., Esq., Thomas J. Madden, Esq., Sharon A. Jenks,
   Esq., and Dismas N. Locaria, Esq., Venable LLP, for the protester.

   Fred Kopatich, Esq., and Mark Langstein, Esq., National Oceanic and
   Atmospheric Administration, and Kenneth Dodds, Small Business
   Administration, for the agencies.

   Paul E. Jordan, Esq., and John M. Melody, Esq., Office of the General
   Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   In small business set-aside, agency's acceptance of firm's claimed
   entitlement to small business status under "nonmanufacturer rule" was
   unreasonable where agency should have known firm's claimed status was
   questionable, and therefore should have challenged its status before Small
   Business Administration.

   DECISION

   Hydroid LLC protests issuance of a purchase order to Brooke Ocean
   Technology USA, Inc. (BOT-USA) under request for quotations (RFQ)
   No. NCNJ1000-6-00001, a 100-percent small business set-aside issued by the
   Department of Commerce, National Oceanic and Atmospheric Administration
   (NOAA), for an autonomous underwater vehicle (AUV). Hydroid asserts that
   BOT-USA was ineligible for the order as a small business.

   We sustain the protest.[1]

   The AUV is to be used in conjunction with manned surface assets to perform
   rapid-response capability for underwater surveys of ports, harbors, and
   inland waterways. The RFQ was issued as a combined synopsis/solicitation
   for commercial items under Federal Acquisition Regulation (FAR) subpart
   12.6. It identified North American Industry Classification System Code
   (NAICS) 334511--Search, Detection, Navigation, Guidance, Aeronautical, and
   Nautical System and Instrument Manufacturing--as applicable to this
   procurement, with an applicable size standard of 750 employees. Vendors'
   quotations were to be evaluated under three factors of relatively equal
   importance--approach, past performance, and price. The RFQ contemplated
   issuance of a fixed-price purchase order for one AUV, 2 years of technical
   support, warranty, and training, with delivery not later than 9 months
   after receipt of the order. The order was to be made on a "best value"
   basis.

   BOT-USA, a small business, submitted a quotation offering an AUV
   manufactured by Bluefin Robotics Corporation, a large business; Hydroid,
   also a small business, submitted a quotation to provide its own AUV. NOAA
   determined that BOT-USA's quotation provided the best value based on its
   technical superiority and lower price, and, on August 9, 2006, issued that
   firm a purchase order in the amount of $1,705,247. NOAA did not notify
   Hydroid of the issuance of the order until August 30, when the protester
   inquired about the procurement's status. On August 31, Hydroid filed a
   timely size protest with the contracting officer, who submitted it to the
   Small Business Administration (SBA) on September 21. On October 18, SBA
   determined that BOT-USA was ineligible for the purchase order because it
   was offering the product of a large business. NOAA subsequently determined
   that it would not terminate BOT-USA's purchase order, and this protest
   followed.

   In order to qualify as a small business concern eligible to provide
   manufactured products under a small business set-aside, a firm must either
   be a small business manufacturer of the end item being procured, or
   provide the product of another domestic small business manufacturing or
   processing concern; this is known as the "nonmanufacturer rule." FAR
   sections 19.001, 19.102(f)(1); 13 C.F.R. sect. 121.406 (2006). The rule
   may be waived where the acquisition is for a product in a class for which
   SBA has determined that there are no small business manufacturers in the
   federal market--see FAR sect. 19.102(f)(4)--or where the contracting
   officer seeks a special waiver from SBA based on the lack of small
   business manufacturers and SBA issues the waiver. FAR
   sections 19.102(f)(5), 19.502-2(c).

   BOT-USA submitted a quotation for the product of a large
   business--Bluefin--as well as the additional work to make the Bluefin AUV
   meet the agency's requirements. However, there was no valid class waiver
   in place exempting AUVs from the nonmanufacturer rule, and the contracting
   officer did not seek or obtain a special waiver. While SBA's list includes
   a class waiver for NAICS 334511--the code identified in the RFQ--the
   waiver, by its terms, covers only "airborne integrated components"; it
   undisputedly does not cover nautical products such as the AUV under the
   RFQ, and NOAA does not now assert that the waiver extended to the AUV. See
   Product Service Code 5821, www.sba.gov/GC/approved.html.

   Since BOT-USA's quotation, on its face, showed that it was based on an
   item manufactured by a large business and, as explained above, it is
   undisputed that the class waiver for NAICS 334511 does not extend to
   nautical items such as the item here, the contracting officer was or
   should have been aware prior to issuance of the purchase order that
   BOT-USA was not an eligible small business. The contracting officer
   asserts neither that she believed there was an applicable waiver, nor that
   she was confused as to the existence of such a waiver.[2] While, in the
   absence of a size protest from an offeror, there is no requirement that a
   contracting officer refer size status questions to SBA, we will review the
   reasonableness of a contracting officer's failure to do so. Jensco Marine,
   Inc., B-278929.7, Feb. 11, 1999, 99-1 CPD para. 32 at 5. Under the
   circumstances here--where the face of BOT-USA's quotation showed that the
   firm was not an eligible small business--we can only conclude that it was
   unreasonable for the contracting officer to accept BOT-USA's quotation
   rather than refer the matter to SBA.

   As noted above, although Hydroid did not learn of the issuance of the
   purchase order to BOT-USA until after the fact, it submitted a timely size
   protest (that is, within 5 days after learning of the issuance of the
   purchase order to BOT-USA, see 13 C.F.R. sect. 121.1004(a)), and SBA
   determined that BOT-USA in fact was not a small business eligible for the
   purchase order based on its quoting of an item manufactured by a large
   business. Further, NOAA decided to leave the purchase order in place after
   SBA determined BOT-USA to be ineligible. Diagnostic Imaging Tech. Educ.
   Ctr., Inc., B-257590, Oct. 21, 1994, 94-2 CPD para. 148 at 3. In prior
   cases where, as here, a contracting agency's improper actions led to an
   award before a size protest could be filed--typically, where the agency
   failed to provide the required pre-award notice of the intended
   awardee--and SBA determined after award that the awardee was not an
   eligible small business, we have sustained the protests and recommended
   termination of the contracts. See, e.g., Spectrum Sec. Servs., Inc.,
   B-297320.2, B-297320.3, Dec. 29, 2005, 2005 CPD para. 227 at 4; Tiger
   Enters., Inc., B-292815.3, B-293439, Jan. 20, 2004, 2004 CPD para. 19
   at 4-5. In these circumstances, in the absence of any legitimate
   countervailing reasons, we view it as inconsistent with the Small Business
   Act, 15 U.S.C. sect. 631-657a, and the integrity of the procurement
   process for an agency to permit a firm that was ineligible under the terms
   of the solicitation to continue performance. Spectrum Sec. Servs., supra,
   at 5.

   NOAA asserts that there are countervailing circumstances that warrant
   leaving BOT-USA's purchase order in place.[3] Specifically, it asserts
   that BOT-USA has "substantially performed work under the contract," and
   that termination of the order would "unacceptably delay[ ]" "an important
   homeland security initiative." NOAA Supplemental Report at 5. As to the
   former reason, NOAA states that BOT-USA has expended more than $236,000 in
   performing the order; as to the latter reason, NOAA asserts that it
   expects termination settlement costs to exceed available funding, thus
   requiring it to postpone acquisition of the AUV for 18 months.

   Among other matters, we have considered substantial performance in
   determining whether there are countervailing circumstances to warrant
   allowing a business concern that is not small to continue performance. In
   our view, the agency has not established the existence of legitimate
   countervailing circumstances here. With regard to the costs reported by
   BOT-USA, we note that they are only 12 percent of the order, and thus do
   not appear to support the agency's claim that the contract has been
   substantially performed. While the agency states that it will be unable to
   fund a resolicitation of this requirement and that terminating the
   purchase order will unacceptably delay an important program, we find it
   significant that it was NOAA's own actions that led to its current
   position. In this regard, since SBA ordinarily makes a size determination
   in 10 working days (approximately 2 weeks), if possible (13 C.F.R. sect.
   121.1009(a)), and here made its determination in 18 working days
   (approximately 4 weeks), had the contracting officer sought SBA's input
   prior to issuing the purchase order, its full funding would have been
   available for an eligible small business to perform and that firm could
   have commenced performance after less than 1 month of delay. Similarly,
   even after issuing the purchase order, NOAA could have significantly
   mitigated its out-of-pocket costs at several points. For example, NOAA
   could have stayed performance when Hydroid filed its size protest with the
   agency 3 weeks after issuance of the purchase order; it could have
   expedited the size appeal process by forwarding Hydroid's protest to SBA
   promptly (13 C.F.R. sect. 121.1006) instead of waiting 3 weeks after
   receiving it; and NOAA could have promptly acted upon SBA's size
   determination, which was completed only 10 weeks after issuance of the
   purchase order. However, the agency did not even obtain information on how
   much BOT-USA had expended until shortly before its agency report was due,
   approximately 1 month after Hydroid filed its protest with our Office and
   more than 14 weeks after the agency issued the purchase order.

   The protest is sustained.

   We recommend that the purchase order placed with BOT-USA be canceled. We
   also recommend that the agency issue a purchase order to an eligible small
   business whose quotation represents the best value to the government. We
   further recommend that the agency reimburse Hydroid's costs of filing and
   pursuing the protest, including reasonable attorneys' fees. 4 C.F.R.
   sect. 21.8(f)(1) (2006).

   Gary L. Kepplinger

   General Counsel

   ------------------------

   [1] On December 12, 2006, our Office conducted an alternative dispute
   resolution telephone conference with the parties. The GAO attorney of
   record explained in detail why he anticipated that the protest would be
   sustained for the reasons set forth in this decision. Because neither
   party took action rendering the protest academic, we are issuing this
   decision.

   [2] Prior to the submission of quotations, the director of NOAA's Office
   of Small and Disadvantaged Business Utilization corresponded with
   Bluefin's parent company by e-mail, and erroneously advised that since
   NAICS 334511 was on the SBA class waiver list, small businesses could
   provide the products of a large business. While the contracting specialist
   for this procurement was copied in the correspondence from the director,
   there is no evidence that she or the contracting officer relied on this
   information in accepting BOT-USA's size representation. Moreover, in the
   absence of a valid waiver, the placement of a purchase order in violation
   of the nonmanufacturer rule would be improper even if those individuals
   had erroneously believed that a waiver applied.

   [3] NOAA also asserts that BOT-USA's appeal to OHA militates against
   terminating the order. However, since OHA has dismissed the appeal as
   untimely, the initial determination "remains in full force and effect"
   with respect to this procurement. See 13 C.F.R. sect. 121.1009(g)(1);
   ALATEC Inc., B-298730, Dec. 4, 2006, 2006 CPD para. 191 at 5.