In a recent decision, the Government Accountability Office (GAO) sustained a protest challenging the Department of the Navy, Naval Undersea Warfare Center’s decision to set aside a procurement for sound navigation and ranging (SONAR) sounding sets for small businesses. The protester, Knudsen Systems, Inc. (KSI), a woman-owned small business, challenged the agency’s set-aside decision after the agency amended the solicitation by removing an erroneous reference to a Small Business Administration (SBA) class waiver and inserting the nonmanufacturer rule (which requires offerors to either manufacture items themselves or buy them from a domestic small business manufacturer). After amending the solicitation to include the nonmanufacturer rule, the agency determined that KSI was ineligible for award. KSI, in turn, asserted that the agency’s set-aside decision was based on inadequate market research that did not consider whether two or more small businesses could meet the requirements of the amended solicitation (referred to as the “rule of two”). GAO found that the agency’s market research and resulting set-aside decision were based on the mistaken assumption that the nonmanufacturer rule did not apply to the procurement, therefore the agency’s “rule of two” analysis failed to assess prospective offerors’ ability to comply with the solicitation’s amended terms (i.e., the nonmanufacturer rule). GAO rejected the agency’s argument that it was entitled to rely on its earlier (pre-amendment) market research as the basis for its set-aside decision and concluded that the agency’s decision to restrict the procurement to small businesses was unreasonable. 

POV: Pre-award bid protests are often necessary when the procuring agency issues a solicitation that is unduly restrictive of competition. Agencies are required to comply with the “rule of two” and properly assess whether the agency has a reasonable expectation that two or more small businesses are capable of performing a set-aside contract. An agency’s market research to support the decision to set aside a procurement for small business must be up-to-date, particularly when an amendment to the solicitation renders prior market research inadequate. Otherwise, as this decision shows, the government’s reliance on outdated market research to improperly restrict competition can serve as a successful pre-award protest ground.