Bidders Bite Back
Contract award protests are on the rise, making for precarious procurement terrain inside government and out.
High above the Potomac and Anacostia rivers in Southeast Washington, construction crews have begun the largest federal construction job since the Pentagon, transforming St. Elizabeths Hospital into the new consolidated campus of the Homeland Security Department. The $3.4 billion project encompasses 4.5 million square feet and eventually will house 22 government agencies.
But the project hit a snag in October 2010 when four losing bidders for a $2.6 billion information technology contract filed protests with the Government Accountability Office. They challenged the selection of Northrop Grumman Corp. to run a massive data network at the site and argued their own bids were unfairly evaluated. Recognizing that mistakes might have been made, the General Services Administration opted to cancel the contract and begin anew.
Northrop Grumman has since filed its own protest of GSA's decision, further delaying issuance of a new solicitation.
Such is the new reality in federal procurement. Key contracts-whether it's $500 million to create an IT infrastructure for the Transportation Security Agency, or $40 billion for a fleet of Air Force aerial refueling tankers-can grind to a halt because of a bid protest. Until the past decade, Ralph White, who heads the bid protest division at GAO, would stop and take notice when contracts protested reached nine figures. "I considered it a big deal," White says. "Now a $100 million contract is a fairly routine thing. We did not used to see that, and certainly not at this level."
Protest filings are on the rise at GAO, reaching a 15-year high in fiscal 2010. Some analysts note few protests are ultimately sustained, and many are dismissed in a matter of weeks. But the delays come at a cost to the government, contractors and the taxpayer. "At the end of the day, it really slows down the process of getting hardware and services to the warfighter," says Daniel Beck, spokesman for the Chicago-based Boeing Co.
GAO bid protests, in some form or another, have been part of federal procurement for nearly a century (the first protest was filed in 1926). But it was not until passage of the 1984 Competition in Contracting Act that the practice became formally structured and regulated by Congress. Companies that believe they were not treated fairly during source selection also can challenge the decision with the U.S. Court of Federal Claims, or directly with the contracting agency, though GAO overwhelmingly is the preferred option.
During the 1980s and early '90s, contractors filed an average of nearly 3,000 protests per year-an astounding figure given the relatively low number of government contract actions at the time. Surprisingly, the rise in protests during the past decade pales in comparison to the sharp increase in contract spending. For example, between fiscal 2001 and 2008, procurement actions increased almost 600 percent and their value rose more than 100 percent, according to the Congressional Research Service. But the number of protests filed during that period went up only 37 percent, indicating that despite popular perception, the proportion of contracts that were protested actually shrank.
"Each year, our contracting agencies take hundreds of thousands of contract actions that could be protested, but more than 99 percent of them don't get protested," says Daniel Gordon, administrator of the Office of Federal Procurement Policy and the Obama administration's top acquisition official. As the government continues to slow its acquisition spending, Gordon expects protest figures to decline as well.
But recent data suggest otherwise. During the past three years, GAO protest filings have skyrocketed 39 percent, reaching 2,220 in fiscal 2010, the highest point since 1995. There are several explanations for the increase, most notably the agency's expanded jurisdiction to task-and-delivery order protests of more than $10 million. In 2010, 189 task order contracts were protested. In 2008, Congress also authorized contractors to protest TSA acquisitions and public-private competition decisions made under circular A-76.
Analysts also see the influx of lucrative, multiyear, indefinite delivery-indefinite quantity contracts-which have the potential to lock a contractor out of agency work for up to 10 years-as a contributing factor. "Larger companies, which were historically more reluctant to file protests because of customer relations concerns, are a little less reluctant," says Thomas C. Papson, a partner at McKenna Long & Aldridge in Washington. "It's almost a circle. As you see your competitors filing protest after protest, it almost legitimizes it from that standpoint."
While protest filings are on the rise, the percentage of cases GAO sustained has remained flat at roughly 20 percent. Most cases never get to that point as contractors find other ways to settle disputes in their favor. Agencies often will eliminate the middleman and renegotiate directly with the contractor.
The 2010 effectiveness rate-based on a contractor receiving "some form of relief from the agency," frequently the reopening of the contract-was 42 percent, according to GAO data. "Protests give agencies and their counsels an opportunity to have a sanity effect on what they have just done," Papson says. "It allows them to go back, take a fresh look with the benefit of the protest issues put on the table and correct the mistakes."
The parties also can agree to use alternative dispute resolution, an increasingly popular "outcome prediction" process in which GAO attorneys inform the parties early in the process about how they will likely rule if forced to draft a decision. The technique typically leads to protests being resolved without further GAO intervention.
The high rate of agency interventions in bid protests could signal that contracting officers are making too many mistakes in following the terms of the solicitation. "The ones that get pulled back without a decision usually have some really basic mistakes in them," White says. "You can't say that you will evaluate [a proposal] one way and then evaluate it another way."
Abusing the System?
A GAO protest generally triggers an automatic stay of the contract award or performance while the protest is pending, though the agency is allowed to move forward under urgent and compelling circumstances. GAO has up to 100 days to issue a decision, a deadline it has never missed.
But critics suggest companies have abused the process either by looking to extend the life of an existing contract by a few months, or by grasping at straws in an effort to uncover some minor error that could lead to a reversal. "We feel protests are being used as a standard business practice, and that disturbs us," Beck says. "We feel that protests are appropriate if there is strong evidence of a problem in the acquisition process but we don't think it's appropriate as a post-award strategy for those contractors that were defeated by bids that were simply deemed superior in a fair and open process."
James E. Cuff, executive vice president of business development, strategy, and mergers and acquisitions at SAIC in McLean, Va., suggests some protests are little more than fishing expeditions. By filing a protest, a company can gain access to far more information than it would typically be entitled to during a post-award debriefing. "It would be healthier for industry, and clearly healthier for the customer, if protests were an extraordinary event," Cuff says. He'd recommend a system in which "people can't protest simply because they don't like the answer and they are hoping to find some flaw, even if they don't know of any flaw, when they file the protest."
SAIC and Boeing have reputations for filing fewer bid protests than do other large contractors. "We treat protests like extraordinary events," Cuff says. "We set a high bar when protesting. There must be a significant mistake in the process."
Boeing, however, was responsible for arguably the most significant protest in recent memory: its successful challenge in 2008 of the Air Force's aerial refueling tanker contract awarded to EADS North America and Northrop Grumman. "It's a costly exercise to go through for us," Beck says. "We also need to be thinking about our relationship with our military and government customers. But with the tanker, we felt there was strong ground for a protest, and GAO validated our concerns." The Air Force has yet to issue a new contract for the tankers.
Pentagon contracts are particularly vulnerable to bid protests. From fiscal 2001 to 2008, Defense Department protests increased 39 percent, the Congressional Research Service notes. "Protests are extremely detrimental to the warfighter and the taxpayer," wrote then-acting Undersecretary of Defense for Acquisition, Technology and Logistics John Young Jr. in an August 2007 memo. "These protest actions consume vast amounts of time for acquisition, legal and requirements team members; delay program initiation and the delivery of capability; strain relations with our industry partners and stakeholders; and create misperceptions among American citizens."
But Gordon suggests its focus on transparency and timeliness makes the U.S. protest system a model for other nations. "I don't think that protests affect agencies' ability to rapidly award contracts, except for the few dozen each year where GAO finds the agency violated procurement law," he says. "And in these cases, it's important for us to stop and get things right."
Tip of the Iceberg
With contract spending expected to decline in the coming years, particularly at Defense, and the larger economy still in slow recovery, some analysts believe the incentives for filing protests will only grow stronger. "Companies are concerned about being locked out of the market and may think it makes more sense to protest," says Rich Rector, chairman of the government contracts practice and partner at the Washington law firm DLA Piper. "With the decline in spending, these are tough economic times, and they are getting tighter in the government space. It could drive people not to be as sanguine when they lose a contract."
It's unclear, however, what, if anything, can be done to stem the tide. Some industry officials want to see a financial penalty levied on losing protesters as a disincentive to filing frivolous challenges. While the topic has been batted around at Defense, the plan does not yet appear to have the administration's support. Some have speculated that fining protesters could deter many firms, including small businesses, from filing legitimate protests.
Others argue that protests will decline only if the government provides additional resources and training to an overburdened and overworked acquisition workforce. "We need to ensure that competition is done right the first time so that the kind of obvious errors you see in some major procurements get made less frequently," Papson says. "Some mistakes leave you shaking your head and asking how they missed that. The answer may be that they are inadequately staffed, or they were under pressure to get it done in an unreasonable amount of time."
Some agencies, however, might be going overboard to protect against protests. Too often, contracting officers issue awards based on initial proposals without conducting further dialogue with bidders for fear that discussions are a "protest-rich area," Gordon says. The result, he says, is the government might be missing out on better or less expensive proposals. In recent months, OFPP has begun meeting with contracting officers in an attempt to "myth bust" the idea that talking with vendors will lead to protests.
"We need to talk with vendors early and often in our acquisitions," Gordon says. "And not talking with them to avoid protests only hurts the government, particularly when more communication could help the agency better figure out what it needs and how to buy it."
While the bid protest system is undeniably imperfect, most agree it's one of the success stories of the American federal procurement structure. GAO works through its cases rapidly and judiciously, often with little complaint from industry. All the while, the bid protest staff at GAO has remained static at roughly 30 employees for the past decade. "What you get is a lot more transparency, integrity, or accountability than in other places," White says. "It's a system I would hate to walk away from and think about what it would mean to provide no opportunity for a redress when people think that something was unfair."