Takeaways

GAO held that agency reasonably disqualified contractor whose quotation disclosed that the contractor had sold relevant contract assets to another company that would perform 100 percent of the relevant contract work as a subcontractor before taking over as prime contractor after the approval of a pending contract novation.
Agencies have significant discretion to disqualify any proposal submitted during the pendency of a novation where the purchaser would perform the bulk of contract requirements.
GAO’s ruling compels contractors and their attorneys to think carefully about the timing and details of government contract asset purchases.

GAO’s recent decision in Wyle Laboratories Inc., B-416528.2, raises significant questions as to the viability of proposals that are submitted before or during, and remain pending after, a government contract acquisition. This is the second recent GAO protest decision that highlights the risks of certain government contract M&A deals to pending procurements, and the decision underscores the importance of strategic planning in connection with such deals.

Background

Last fall we wrote about a pre-award GAO protest with significant implications for proposals submitted during pending government contract acquisitions. Specifically, in the predecessor case of Wyle Laboratories Inc., B-416528, GAO held that a contractor that had sold government contract assets to another company pending government approval of a request for novation deprived itself of “interested party” standing to file a protest of the procurement.

Prior to submitting its quotation, Wyle had entered into an asset purchase agreement (APA) whereby it had transferred all the “assets and liabilities used in or relating to performance” of Wyle’s One Acquisition Solution for Integrated Services (OASIS) multiple-award, indefinite-delivery, indefinite-quantity (IDIQ) contract to Grant Thornton. As the nominal holder of the OASIS contract (pending novation), Wyle submitted a task order quotation to provide professional, technical, and operational support services to the Department of Homeland Security, U.S. Customs and Border Protection. Wyle’s quotation disclosed the asset purchase and pending novation and stated that Grant Thornton would perform 100 percent of the work under the order—initially as a subcontractor and then as prime contractor once the novation was approved. Wyle also attempted to protest the terms of the solicitation as unduly restrictive of competition. GAO dismissed Wyle’s pre-award protest because it found Wyle, having transferred its direct economic interest in the performance of the order, was not an “interested party” with standing to protest.

Award and Post-Award Protest

During the pendency of the pre-award protest, the agency’s technical evaluation team conducted a preliminary technical evaluation and assigned Wyle’s quotation an “outstanding” rating under the technical and management factor. After GAO dismissed Wyle’s pre-award protest for lack of standing, however, the agency deemed Wyle ineligible for award for failing to evidence the offeror’s intent and capability to perform the order in question. The agency, in turn, made award to the only other offeror.

Wyle filed a post-award protest, alleging that since the agency had assigned ratings, the agency already had determined that Wyle was capable of performing. Thus, Wyle argued, the agency should not have disqualified Wyle’s proposal. GAO’s decision states, however, that the assigned ratings related to the capabilities and experience of Grant Thornton, not Wyle. The agency also cited the “considerable risk” that “Wyle could switch out Grant Thornton with another contractor.” On review, GAO found the agency’s risk assessment reasonable, noting that if the novation was not approved, the agency might not receive the performance proposed in Wyle’s quotation. GAO also deemed the fact that Wyle demonstrably could perform the contract irrelevant because Wyle’s capabilities and performance were not proposed in the quotation.

Implications and Conclusion

Government contract asset purchases are common. With respect to pending proposals, the basic rule is that “[t]he transfer or assignment of rights and obligations arising out of proposals is permissible only where the transfer is to a legal entity which is the complete successor in interest to the offeror by virtue of merger, corporate reorganization, the sale of an entire business, or the sale of an entire portion of a business embraced by the proposal.” See Ionics Inc., B-211180, 84-1 CPD ¶ 290. Yet, the lesson from Wyle Labs is that agencies appear to have significant discretion to disqualify proposals pending novation approval. As a result, parties to a government contract asset sale must think strategically to limit their risk.

One solution would be to attempt to time the transaction and subsequent novation approval to occur prior to the date required for submission of proposals, so that the buyer may submit the proposal in its own name. Contractors, however, cannot control the speed of the novation approval process or always predict its outcome. Precision with novation paperwork nevertheless may expedite the novation process. Another potential solution, designed to preemptively address evaluator concerns, may involve careful proposal drafting with attention to the treatment of the assets in question. In sum, Wyle Labs reflects that contractors will have to think more strategically and creatively than ever in the context of asset sales involving pending or new proposals.