COFC Stands Athwart the Tide of Blue & Gold Creep and Says “Stop”; VS2, LLC v. United States, COFC No. 21-1028C

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Protest challenging agency’s decision to make a new award in light of a GAO decision is granted. After an initial award, GAO sustained a protest and recommended the agency to transfer the award made to one company, VS2, to another company, Vectrus. GAO found the agency improperly adjusted Vectrus’s costs. VS2 filed a COFC protest challenging the transfer of award. The government argued the protest was untimely under Blue & Gold because VS2 knew of the GAO recommendation but didn’t challenge it until after the agency made the new award. The court found that while recent decisions have expanded Blue & Gold, the waiver rule did not apply to a corrective action taken after a GAO decision. As to the merits of the protest, the court found that GAO had erroneously determined that Vectus’s offer to cap its costs resolved the performance risk caused by the company’s unrealistically low costs.

The Army issued a solicitation seeking logistics support services. The solicitation provided that award would be made to the lowest-priced, technically acceptable offer. The solicitation required the Army to conduct a cost realism and advised that unrealistically low costs could result in a most probable cost adjustment or the proposal being rejected.

The Army received proposals from, among others, VS2, LLC and Vectrus Mission Solutions Corporation. The Army conducted discussions with offerors in the competitive range, including Vectrus. The Army advised Vectrus that its proposed labor rates were too low and that this created performance risk. In response, Vectus stated that it made a business decision to absorb any extra labor costs.

But the Army determined that Vectrus’s decision to absorb costs was still unrealistic, reasoning that it would result in Vectrus not hiring sufficient staff. Accordingly, the Army adjusted Vectrus’s price upwards by $19 million. This adjustment meant that VS2 had the lowest-priced, technically acceptable proposal and thus received the award.

Vectrus filed a protest with GAO, arguing that the Army had erred in upwardly adjusting the company’s price. GAO sustained the protest. GAO concluded that Vectrus had made a legally binding promise to absorb some of the labor costs, but that the Army had made an unwarranted assumption that Vectrus could forego hiring staff. GAO found the agency’sadjustment of costs unreasonable, reasoning that any question concerning Vectrus’s ability to perform the contract concerned the company’s responsibility; ability to perform was not a matter to considered in the cost realism analysis. GAO recommended that the Army terminate the award made to VS2 and give it to Vectrus.

The Army followed GAO’s recommendation. VS2 filed a GAO protest challenging the award to Vectrus. GAO dismissed the protest us an untimely request for reconsideration.

VS2 then filed suit with Court of Federal Claims, alleging that the GAO decision and the Army’s subsequent award to Vectrus were irrational. Vectrus intervened. All the parties moved for judgment on the administrative record.

The government and Vectrus argued that VS2 had waived its protest under Blue & Gold Fleet, L.P. v. United States, 492 F.3d 1308 (Fed. Cir. 2007). Blue & Gold holds that a party must file a protest challenging the terms of a solicitation before the close of bidding or they waive their protest. In recent years, the Federal Circuit and the COFC have expanded Blue & Gold, applying it to protest arguments that did not exist before the proposal deadline but arose—perhaps through a solicitation amendment—after proposals were submitted. In those cases, courts have held that Blue & Gold requires an offeror to file a protest before contract award.

The government and Vectrus argued that in line with these cases, Blue & Gold should apply to challenges to a corrective action or even any alleged problem in the procurement process. They contended that in this case, GAO had recommended that the Army take corrective action by terminating the contract with VS2 and awarding the contract to Vectrus. But VS2 didn’t challenge the corrective action until the Army actually awarded the contract to Vectrus. The government and Vectrus argued that by failing to challenge the corrective action before the new award, VS2 had waived its protest.

The court, however, declined to expand Blue & Gold in the manner urged by the government and Vectrus. As an initial matter, the court did not believe that recent Federal Circuit cases had expanded the scope of Blue & Gold that far. There is no suggestion in Blue & Gold that its waiver rule applies to anything other than a challenge to the terms of the solicitation. To the extent the Federal Circuit has expanded the waiver rule, it really only shifted the cut-off date for a protest depending on when the issue arises. If the issue with the solicitation is apparent before the proposal deadline, then a protest must be filed before the deadline. If the issue arises after the proposal deadline, then the protest must be filed before contract award.

Additionally, the factual circumstances in this case were distinguishable from those cases in which the court extended Blue & Gold. In those cases, the protester had been aware of their challenge before award, but they didn’t bring the protest until after award. But in this case, VS2 did could not have immediately filed suit challenging the GAO decision because GAO’s recommendation of corrective action did not guarantee that the Army would take corrective action. Here, it could not be said that VS2 had sat on its rights.

The court reasoned that aside from a few limited circumstances, the Blue & Gold waiver rule should be applied in narrowly defined circumstances. At the very least, it should only apply when the plaintiff can determine the precise filing date for its complaint. In this case, until the Army implemented the corrective action, VS2 could not ascertain a deadline for its complaint. Blue & Gold did not apply.

The court the turned to the merits—i.e., whether the GAO decision, and the new award to Vectrus made in accordance with that decision, was unreasonable The court found that the GAO decision was erroneous as matter of law.

The court reasoned that the purpose of a cost realism analysis it to prevent offerors from gaining an advantage over competitors by proposal an unrealistically low cost, and to determine whether offerors understand the contract requirements. When an agency determines that a proposed cost is unrealistically low, the agency must (1) account for that low cost by considering whether to adjust the costs upward, and (2) it must consider whether the proposed costs are indicative of performance risk.

Here, the Army found that Vectrus’s costs unreasonably low. But Vectrus offered to cap its costs. The court reasoned that this should have resolved the upward adjustment prong of the analysis. When a firm caps it costs, it shifts the risk of liability for the cost to the offeror. Any upward adjustment in costs in the face of a cap is improper. Thus, the court concluded, GAO had correctly found that the Army erred in upwardly adjusting Vectrus’s costs.

The problem was that GAO botched the second, performance risk prong of the cost realism analysis. GAO improperly concluded that in light of the cap on costs, any problem with an offeror’s ability to perform is a matter of responsibility rather than a matter considered during the cost realism evaluation. But the cap did not absolve the agency from assessing performance risk. When an offeror agrees to cap its costs during performance and suggest the possibility of absorbing loss, the agency cannot ignore performance risk.

Indeed, in this case the Army had concerns about performance risk; it was worried that Vectrus would forego hiring staff needed for the contract. But GAO’s ultimate decision compelled the Army to ignore its concerns and just give the contract to Vectrus.

In essence, the court reasoned, GAO issued a per se rule that would obviate the need to assess performance risk whenever an offeror caps its costs. The court found that this per se rule was inconsistent with the FAR and the purpose of a cost realism analysis, which is to assess whether an offeror’s understanding of contract requirements. When an offeror agrees to cap costs, it may remove the cost risk itself, but the risk unsuccessful performance remains or is even amplified.

GAO erred in directing the Army to effectively ignore the performance risk it had already found in Vectrus’s proposal and to simply give the award to Vectrus.

VS2 raised additional challenges to the award, alleging that Vectrus had improperly shifted labor categories, and that the Army unreasonably evaluated Vectrus’s past performance. The court rejected these arguments, finding that the labor category argument was an untimely challenge to the terms of the solicitation, and that the Army had reasonably assessed past performance.

The court issued a permanent injunction precluding the award to Vectrus and ordering the Army to reconsider its award decision taking into account the performance risk posed by Vectrus’s low costs.

VS2 is represented by Paul Khoury, Craig Smith, Cara L. Lasley, and Nicholas L. Perry of Wiley Rein LLP as well as Cameron S. Hamrick, C. Peter Dungan, and Roger V. Abbott of Miles & Stockbridge P.C. The intervenor, Vectrus, is represented by Kevin P. Mullen, James A. Tucker, Alissandra D. Young, and Victoria D. Angle of Morrison & Foerster LLP. The government is represented by Sosun Bae, Brian M. Boynton, Martin F. Hockey, Jr., and Douglas K. Mickle of the Department of Justice as well as Dana J. Chase and Captain Ethan S. Chae of the Army