Piliero Mazza &
Pargament, PLLC

Vol. V, Issue 8
September/October 2000

An Update for Federal Contractors and Commercial Businesses


Final Rule Issues on Contract Bundling

Businesses Should Conduct Periodic Legal Audits of Their Websites

GAO Sustains Protest of A-76 Source Selection




Final Rule Issued on Contract Bundling

Final rules were recently published in the Federal Register regarding contract bundling. The rules, which took effect July 26, 2000, revise the Small Business Administration ("SBA") regulations and the Federal Acquisition Regulation ("FAR") and require federal agencies to demonstrate that the "bundling" of contracts is "necessary and justified." If the agency cannot demonstrate that bundling is necessary and justified, then it cannot go forward with a bundled acquisition without a determination by a senior official. The rules are intended to preserve contract bundling as a legitimate and desirable initiative and to avoid unnecessary and unjustified bundling that precludes small business participation as prime contractors.

The "bundling" of contracts means consolidation of two or more requirements previously performed by one or more small business concerns under separate smaller contracts, (or that were suitable for award to one or more small business concerns) and which, as consolidated, would be unsuitable for award to small business concerns because of size, dollar value or geographical dispersion of contract performance sites.

Under the new rules, bundling will be deemed "necessary and justified" for procurements valued at more than $75 million, if it produces "measurably substantial benefits" equivalent to at least $7.5 million or five percent of the contract value (including options), whichever is greater. For contracts valued at $75 million or less, an agency must show that the benefits of consolidation would be equal to ten percent of the contract value.

In determining "measurably substantial benefits," an agency may include cost savings or price reduction, quality improvements to save time or improve or enhance performance or efficiency, reduction in acquisition cycle times, better terms and conditions and other similar benefits. The reduction of administrative or personnel costs alone may not be used to justify bundling of contract requirements unless the administrative or personnel costs savings are expected to be substantial in relation to the dollar value of the procurement to be consolidated. To be substantial, administrative cost savings must be at least ten percent of the contract value of the procurement (including option years). The agency is required to put a dollar value on the identified benefits and explain how it arrived at the dollar value.

In cases in which an agency cannot establish that a bundled procurement produces measurably substantial benefits, the deputy secretary or assistant secretary for acquisition, may nevertheless determine, on a non-delegable basis, that a bundling requirement is necessary and justified if the benefits are "critical to the agency's mission success" and the procurement strategy provides for maximum practical participation by small businesses.

Under the bundling rules, an agency is required to submit a copy of a proposed acquisition involving bundling of requirements to the SBA procurement center representative ("PCR") for review. The agency must explain the reasons why it believes the bundled requirement is necessary and justified or, if the dollar value of the procurement renders small business participation unlikely, why the solicitation cannot be structured to permit small business participation.

If the PCR believes the proposed procurement will render small business prime contractor participation unlikely, or that the bundled requirement is not necessary and justified, the PCR should recommend alternative procurement methods to the agency. Such alternatives may include: (1) breaking up the procurement into smaller discreet procurements; (2) breaking out one or more discreet components for which a small business set aside may be appropriate; and (3) reserving one or more awards for small companies when issuing multiple awards under task order contracts.

In cases where there is a disagreement between a PCR and the contracting officer regarding the suitability of a particular acquisition for a small business set-aside, the bundling rules provide that the PCR may appeal the proposed bundling to the head of the contracting activity. If the head of the contracting activity disagrees with the SBA's position, then the SBA may appeal the matter to the secretary of the department or the head of the agency.

In cases in which the PCR determines that the agency has established that the bundling is justified and necessary, it will nevertheless work with the procuring activity to tailor a strategy that preserves small business prime contractor participation to the maximum extent practicable. It may also recommend that the solicitation and resulting contracts specifically state the small business subcontracting goals expected of the contract awardee, or that the small business subcontracting goals be based on total contract dollars instead of subcontract dollars.

The new rules provide guidance to agencies on the future bundling of requirements. However, at this point, it is unclear whether the rules will be effective in protecting small business interests. Given the administrative appeal process, it is unclear whether the General Accounting Office will entertain protests of improper bundling. Until agencies become familiar with the requirements of the new rules, it will be incumbent on small businesses and the SBA to ensure that the rules are followed whenever agencies appear to be bundling requirements.



Businesses Should Conduct Periodic Legal Audits of Their Websites

With increased use of the Internet to develop and cultivate commerce, many businesses are establishing their presence on the Internet by creating and maintaining their own Internet websites. While creating a wealth of opportunities for businesses, the establishment and maintenance of these sites may subject site owners to a wide variety of unanticipated legal consequences. As a result, periodic legal audits of websites are needed to minimize the legal exposure and risks.

A legal audit of a website may begin by examining the issue of who "owns" the website. Many businesses are shocked to learn that, although they commissioned the construction of the site, they do not own the copyright to the design and "look and feel" of the site. If a company employee designed the site as part of his normal duties, then the company likely owns the proprietary rights to its site. If, however, design and construction of the site was commissioned to an independent contractor, the contractor may own the copyright, absent a written agreement to the contrary. Accordingly, a legal audit of any such written agreements will help to delineate those rights belonging to the company, and those belonging to the contractor or developer.

An equally important consideration to businesses maintaining a website is the issue of who owns proprietary rights to the site's content. If a company created all of the content on the website and has not used material belonging to another party, then the company itself owns all proprietary rights to the content.

If, however, the company posts material created by a third party, then several considerations come into play. For example, many businesses license content from third parties, and post this content on their websites. An audit of these license agreements, therefore, should ensure that such businesses have the right to reproduce, and distribute the content for use on the sites. Additionally, an audit should ensure that the companies have secured appropriate representations and indemnities, regarding the content, from the third parties.

Such licenses are extremely important, as businesses that use third party content without securing the owner's permission may be in violation of applicable copyright, trademark, and tort law. For example, the unauthorized reproduction of text, by copying such text to a website, may violate copyright law, even if the website owner modifies the text to suit its own needs.

Similarly, use of a third party's graphics or logos may violate applicable trademark law, if the use of such third party content is likely to confuse the public as to whether the trademark owner endorses or is affiliated with the website owner. Additionally, a website owner's unauthorized use of a photograph for commercial use may violate copyright law. Such use may also violate tort law, which protects each person's right to privacy, if the photograph depicts an individual's likeness.

Finally, if a company hosts a message or "chat" board on its website, an audit should entail determining whether the site owner also posted "terms of use" which govern third parties' use of such boards. At a minimum, the terms of use should require users to exercise an affirmative method of reading and accepting any legal disclaimers on the site regarding content, and should include notice of the company's procedures for removing offensive content. In this regard, it is noted that, to the extent the website owner exercises little control over third party content and acts merely as a conduit, rather than an editor of the content, the greater the likelihood that the owner will be able to escape liability for such content's infringement of applicable law.

These are just a few of the considerations that should be reviewed during a legal audit of websites. Obviously, there are many others. We will explore some of these additional considerations in future issues of the Legal Advisor.



GAO Sustains Protest of A-76 Source Selection

Contractors who are reluctant to participate in competitions for requirements subject to cost comparisons under OMB Circular A-76 should be encouraged by a recent decision of the General Accounting Office ("GAO"). In Rice Services, Ltd., the GAO subjected the Navy's cost comparison procedures under the Circular to the kind of scrutiny critics of the A-76 cost comparison process have often cited as a reason for not participating in these competitions. In sustaining the protest, the GAO held that the level and quality of performance of the "best value" contractor's proposal is the benchmark against which the level and quality of performance of the government's Most Efficient Organization ("MEO") must be measured.

In A-76 cost comparisons, procuring agencies often use two-step best value procedures. The first step involves the selection of the private contractor who offers the "best value" to the government. In some cases, this process results in the highest priced contractor being selected for comparison to the in-house MEO bid. The second step involves the comparison of the best value contractor's proposal with the MEO's bid. The MEO bid, however, is often selected using lowest price criteria. The GAO made clear in Rice that this practice is unacceptable.

In Rice the GAO stated that "private-sector offerors and the government must compete on the basis of the same scope of work." According to the GAO, when a "best value" approach is taken in evaluating private-sector proposals, the government must perform a direct comparison between the non-price aspects of the MEO and the "best value" contractor's proposal to determine "whether or not the same level of performance and performance quality will be achieved." Based on its review of the procedures used by the Navy in Rice, the GAO concluded that the Navy had no reasonable basis to determine that (1) performance under the MEO would meet the Performance Work Statement ("PWS") requirements, or (2) the level and quality of performance that would be obtained under the MEO were equivalent to the level and quality of performance that would be obtained under Rice's proposal.

The GAO found that the record contained no documentation that reflected a reasoned analysis of the manner in which the MEO staffing plan would meet the PWS requirements. Rather, the evaluators assumed that the government knew what it took to perform the work. In addition, the GAO found that the record failed to reflect any meaningful comparison of performance under the MEO with performance under Rice's proposal. In fact, the GAO found that the few representations made in the comparison between the MEO and Rice's proposal contradicted the more positive evaluation given to Rice during the initial evaluation of the private-sector proposals. Furthermore, while the Navy characterized the MEO as reflecting an "innovative strategy to re-structure existing services," the record contained no analysis regarding the MEO's intended staffing to perform any PWS requirements. Rather, the evaluators simply assumed that such staffing would be adequate.

The GAO found even more disturbing the evaluators' finding that both plans met the requirements of the PWS, especially in view of the fact that the comparison of the MEO to Rice's proposal was done only on a general level. Under this general comparison, "an employee working part-time under the MEO was essentially considered to be equal, without regard to level of performance, to an employee working full-time under Rice's proposal." This assumption was held to be "unreasonable."

The GAO also noted that the evaluator's review criteria contradicted the standards set forth in the solicitation. Specifically, the solicitation stated that "the ultimate focus of the management team should be to not merely meet expectations, but to exceed them" and that non-price evaluation factors would be "significantly more important than cost or price." The Navy appeared to apply this scheme correctly in selecting Rice. The Navy selected Rice's proposal as the "best value" among private competitors even though it did not offer the lowest price. The Navy's selection of Rice was based on non-price aspects of its proposal – specifically, the proposed staffing plan – which significantly exceeded many of the solicitation requirements. The consideration of the MEO, however, was much different. Thus, the GAO held that, unless the Navy changed the requirements of the solicitation, it would have to make adjustments to the MEO to meet the performance level of Rice's proposal (as the selected private-sector offer) rather than the standards of the PWS. According to the GAO, the agency is not free to compare an MEO and private-sector offer of differing performance levels and make a cost/technical tradeoff between them.

The decision in Rice is consistent with other recent decisions of the GAO in which cost comparison procedures have been subjected to much greater scrutiny. Given the emphasis the President and Congress are giving to the downsizing of the government through outsourcing, it is not surprising that the GAO is doing so. Unless cost comparisons are conducted fairly, contractors will be reluctant to participate in the process, making it difficult for the government to achieve its objective of relying on commercial sources to supply the products and services the government needs. The Rice decision should aid contractors to compete on a more level playing field with the MEO.

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