Government Contracts Contract Modifications Violated CICA and VA Rule of Two
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Monday, October 29, 2018

Contract Modifications Violated CICA and VA Rule of Two

By Government Contracts Editorial Staff

Medical suppliers succeeded on the merits of their protest of sole-source modifications to prime vendor medical supply contracts because, according to the Court of Federal Claims, the modifications improperly circumvented the Competition in Contracting Act and violated the Rule of Two. The four contracts required the prime vendors to stock, store, and distribute medical supplies on a “master list”—or formulary—against which Department of Veterans Affairs hospitals could place orders. Following an unsuccessful solicitation to expand the program from 200 items to 80,000 items, the government issued a Class Justification and Approval and expanded the scope of work to include supply as well as distribution. The court agreed with the protesters that the modifications were an “end-run” around CICA’s mandate for full and open competition (41 USC 3301(a)(1)) and the VA’s obligation to consider veteran-owned small businesses for contract awards (38 USC 8127(d)).

Suppliers Unable to Compete. The J&A found only the prime vendors were in a position to identify quickly sources and prices for formulary items, but it did not address the protesters’ loss of sales to the government at the supplier level. Further, although the actual sale of supply items before and after the modification was between the prime vendors and the government, a new non-trivial competitive harm—the loss of competition—resulted from the modifications. By outsourcing the selection of suppliers to the prime vendors, the government “avoided the multitude of legal and regulatory requirements appurtenant to a federal procurement.” 30,000 new items had been placed on the formulary since the filing of the protests, and the sales of those items would not be competed. The J&A was insufficient because it was silent as to the purchase of any particular item on the “now much-expanded list,” and the government did not provide a lawful reason how this arrangement satisfied CICA.

Injunctive Relief Denied. Also, the government’s outsourcing of its selection of supply vendors violated the Rule of Two. Under this unique requirement, VA must consider whether a VOSB or service-disabled VOSB can provide goods that it wishes to procure. If two or more such entities can provide the items, VA must attempt to buy from those sources by running a competition limited to only those concerns (Kingdomware Technologies v. U.S., SCt, 60 CCF ¶80,910). The protesters were all SDVOSBs, but the prime vendors were not required to consider whether two VOSBs could provide an item for the formulary or limit their consideration to VOSBs, and the protesters would not have any right to challenge a prime vendor’s selection of non-VOSBs. Nevertheless, injunctive relief was denied because the equities did not favor the plaintiffs. The harms alleged by the protesters—the loss of opportunity to compete to sell supplies to the government—was “somewhat speculative,” while the potential harm to the government—disruption of the VA’s supply chain for medical and surgical supplies—was “real and potentially grave.” (Electra-Med Corp., et al. v. U.S., et al., FedCl, 62 CCF ¶81,492).

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