ny ____________________________________________ GRANTED IN PART: November 17, 1992 _____________________________________________ GSBCA 12023-P VALIX FEDERAL PARTNERSHIP I, Protester, v. DEPARTMENT OF HEALTH AND HUMAN SERVICES, Respondent. Shelton H. Skolnick, Derwood, MD, counsel for Protester. Barbara Robinson, Office of General Counsel, Department of Health and Human Services, Washington, DC, counsel for Respondent. Before Board Judges BORWICK, PARKER, and HYATT. BORWICK, Board Judge. Background The Department of Health and Human Services, through the National Institutes of Health (NIH), is conducting a procurement for forty-seven personal computers for use by the Grants Administration Branch of the National Cancer Institute. Competition for this unrestricted procurement is open to all and not limited to the exclusive participation of small businesses. NIH did not set the procurement aside because the contracting officer determined that there were not two or more small business vendors capable of offering the specified products within the applicable labor surplus area of Washington, DC. Protester, Valix Federal Partnership I (Valix), is a prospective small business offeror under this solicitation. Valix seeks, in a protest filed on September 18, 1992, to limit its potential competition by claiming that the procurement should have been set aside exclusively for small business participation. Valix sees itself as a manufacturer and posits that there must be at least one other small business vendor of personal computers who is also a manufacturer, thus justifying a set-aside. Valix also challenges the evaluation criteria of the solicitation. We grant the protest in part. The contracting officer determined that there was no reasonable expectation of receiving a sufficient number of responses from Small Business/Labor Surplus Area sources to assure competition. That determination was based on the advice of the Office of Small and Disadvantaged Business Utilization (SADBUS) that there were not two or more small business manufacturers within the local labor surplus area. The contracting officer did not consider all the relevant factors set forth in the Federal Acquisition Regulation and the Small Business regulations. Although the record does not permit a conclusion that the procurement should have been set aside for exclusive small business participation, we revise respondent's delegation of procurement authority and return the procurement to the agency to make another determination, this time considering all the factors specified in the applicable regulations. The protester's allegations of improprieties in the evaluation criteria lack merit and the protest is denied as to those issues. Findings of Fact 1. On April 4, 1992, respondent forwarded a statement of requirements to its Office of Small and Disadvantage Business Utilization (SADBUS) for a determination whether the procurement should be subject to a small business set-aside. The requirement was for a Gateway 2000 personal computer, 33 Megahertz (MHz), 486 Cache, or equal meeting the stated salient characteristics. Protest File, Exhibit 1. The significant salient characteristics were: 80486, 33 MHz, microprocessor, with tower vertical case 64 Kilobytes (Kbytes) of SRAM cache 8 Megabytes (Mbytes) of DRAM (70 nanoseconds SIMMS) expandable to no less than 64 Mbytes 200 Mbytes IDE hard drive (15ms), 10 M/Bit DTR with 64K multi-segmented cache buffer Diamond Speedstar Plus 16 Bit Super VGA board with 1 Mbyte (1024X768) 14 inch non-interlaced 1024 Crystal Scan Super VGA monitor One year warranty on parts and labor. Id. In addition, the equipment offered had to be tested for compatibility and certified by the Microsoft Corporation for use with Lan Manager 2.1 or the software in use with National Cancer Institute Local Area Networks. Id. 2. SADBUS determined that there was: No reasonable expectation of receiving a sufficient number of responses from Small Business/Labor Surplus Area sources to assure competition. Protest File, Exhibit 1. In making this determination, the SADBUS specialist relied on SBA's procurement automated source system (PASS), the Public Health Service profile system, and NIH's own capability file. Transcript at 53. These sources did not identify small businesses that could manufacture the personal computers called for by the requirements. Transcript at 56. The SADBUS specialist, the senior contract specialist, and the contracting officer testified that to be listed as a manufacturer in the PASS system, a company need only identify itself as such. Transcript at 75, 113-114. The Chief of the Acquisition Branch (the SADBUS's specialist supervisor) testified that manufacturing was a process whereby a business would add fifty percent or more of the value to the particular product. Transcript at 97. The contract specialist who concurred in the SADBUS determination considered a manufacturer "someone who makes the equipment in the sense that if it's made out of components, they make a significant part, even if they buy other components."[foot #] 1 Transcript at 114. 3. In making its computers, Valix has two people sitting at a table, putting components into cabinets. Transcript at 15.[foot #] 2 Final assembly can take as little as fifteen minutes per machine, using preassembled components. Transcript at 40. Valix does not make any of the components it uses in the assembly of the end unit. Transcript at 36. It obtains components from two dozen suppliers. Transcript at 10. Valix also tests the assembled computer to make sure it boots and "burns-in" the computer for a minimum of twelve, but often twenty-four, hours. Valix also packs the computer for shipping. Transcript at 20-23. There are many business which perform the same functions. Protester's Exhibit 7; Transcript at 36-37. 4. On August 19, 1992, NIH issued the solicitation calling for supply of forty-seven personal computers meeting certain ----------- FOOTNOTE BEGINS --------- [foot #] 1 Department of Labor (DOL) regulations, implementing the Walsh-Healy Act, 41 U.S.C. 35 (1988), provide that a bidder-assembler is also considered an eligible (under the Walsh-Healy Act) manufacturer if the bidder has demonstrated an independent ability, with its plant, equipment and personnel, to perform a significant or substantial portion of the manufacturing operations and efforts required in producing the final product for which the Government contracted. 41 CFR 50-206.52(b)(2) (1991). [foot #] 2 It also has twelve to fifteen part-time employees to draw upon. Transcript at 20. ----------- FOOTNOTE ENDS ----------- salient characteristics, including the requirement for 80486 chip, 33MHz, tower vertical case, front panel reset, and fourteen inch VGA monitor. Protest File, Exhibit 6, C.2.1. The evaluation criteria provide for assessment of technical merit, i.e., whether vendors submit proposals which meet technical requirements. In addition, there is a subjective assessment of risk and warranty support with risk weighted at 45 percent and warranty support weighted at 15 percent. Id., Exhibit 6 at M.2. Cost is weighted at forty percent. Id. 5. The risk assessment's purpose is to determine whether "the offeror will be able to meet the desired delivery and have the financial wherewithal to accommodate an order of this magnitude." Vendors are to document experience in filling orders of the volume called for, customer references, and financial statements. Protest File, Exhibit 6 at M.2. Discussion The issue here is not whether the Government in the exercise of its discretion can set aside an acquisition for the exclusive participation of small business, but the conditions under which the NIH must set aside an acquisition. The NIH defends its decision not to set aside the acquisition by arguing that the contracting officer reasonably concluded that there were not two manufacturers within the meaning of the Walsh-Healy Act, 41 U.S.C. 35-45, and its implementing regulations. Respondent's Post-Hearing Brief at 11-14. The Federal Acquisition Regulation (FAR) provides: 19.502-1 Requirements for setting aside acquisitions Using the order of precedence in 19.504, the contracting officer shall set aside an individual acquisition . . . when it is determined to be in the interest of . . . (c) assuring that a fair proportion of Government contracts in each industry category is placed with small business concerns and when the circumstances described in 19.5022 . . . exist. 19.502-2 Total set-asides. (a) The entire amount of an individual acquisition . . . shall be set aside for exclusive small business participation if the contracting officer determines that there is a reasonable expectation that (1) offers will be obtained from at least two responsible small business concerns offering the products of different small business concerns . . .; and (2) award will be made at fair market prices. (b) In industries where the SBA finds there are no small business manufacturers, it may waive the nonmanufacturer's rule for regular dealers. . . . 48 CFR 19.502 (1991). A number of regulations define "small business concerns." Small Business Administration regulations provide that to qualify as a small concern in Government contracts reserved for small business such as small business set- asides for the procurement of manufactured products, "an offeror must be either a manufacturer or a regular dealer under the Walsh-Healy Act and, in addition, must manufacture the end item being produced[.]" 13 CFR 121.906(a) (1991). There is, however, an exception to this rule. If a non- manufacturer of less than five hundred employees represents that it will supply the product of a small business concern that is the manufacturer (as defined later in the regulation) of the end product, that concern will be deemed to qualify as a small concern. This definition of manufacture is less strict than the definition which incorporates the standard of the Walsh-Healy Act. Manufacturer is defined as "the concern, which, with its own facilities performs the primary activities in transforming inorganic . . . substances, including the assembly of parts and components, into the end item being acquired." 13 CFR 121.906(b)(2)(1991). Firms which perform only minimal operations are not manufacturers. The agency is to consider "the proportion of total value in the end item being added by the efforts of the concern," and "the importance of the elements added by the concern to the function of the end item, regardless of their relative value." 13 CFR 121.906(b)(2)(i), (ii). These requirements are echoed in part 19 of the FAR: 19.102 Size standards . . . . (f) Any concern which submits a bid or offer in its own name . . . but which proposes to furnish a product which it did not itself manufacture, is deemed to be a small business when it has no more than 500 employees and- (1) [I]n the case of Government acquisitions set-aside for small businesses, such nonmanufacturer must furnish in the performance of the contract, the product of a small business manufacturer or producer, which end product must be manufactured or produced in the United States. . . . The manufacturer of the end item being acquired is the concern which, with its own forces transforms i n o r g a n i c . . . s u b s t a n c e s , including . . . miscellaneous parts into end items. Whether a bidder on a particular acquisition is the manufacturer or a nonmanufacturer for the purpose of size determination need not be consistent with whether such concern is or is not a manufacturer for the purpose of the Walsh-Healy Act. 48 CFR 19.102(f)(1) (1991). The set-aside order of precedence for total set-asides is (a) a total small business set-aside for a labor surplus area, and (b) a total small business set-aside for small business concerns. 48 CFR 19.504 (1991). The determination of the contracting officer that there is a reasonable expectation of receiving offers from at least two responsible small business concerns is a matter of business judgment that will not be disturbed unless that determination is unreasonable. Cf. RBC Inc., B-233589, March 28, 1989, 89-1 CPD 316, at 2. Analysis using prior procurement history, market surveys, advice from the agency's small business specialist and technical personnel may constitute adequate grounds for a decision not to set aside a procurement. Cf. American Imaging Services Inc., B-246124.2, Feb. 13, 1992, 92-1 CPD 188, at 3. The contracting officer, however, must consider the relevant factors in making her determination. One procurement official defined manufacturing for purposes of a set-aside using a fifty per-cent test. Finding 2. But that test applies to purveyors of kits. 48 CFR 19.102(f)(2)(1991). Personal computers, not personal computer kits, were specified here. Finding 1. The SADBUS specialist (and the other contracting personnel) focused on whether there were manufacturers as defined by the Walsh-Healy Act. Finding 2. There may not be two or more manufacturers of that type. Indeed, Valix has not proven it is a manufacturer under that restrictive definition. See Finding 3. Valix has, however, demonstrated that it transforms components into personal computers and that there are many small business concerns that do the same. Id. The contracting officer must consider the factors specified in 13 CFR 121.906(b)(2)(i), and (ii), to determine whether there are two or more business which qualify under 13 CFR 121.906(b)(2)(1991). In short, these regulations require that NIH's contracting officials perform a more sophisticated analysis than the analysis that was done. In failing to consider those factors, the contracting officer's determination violated 48 CFR 19.502-2(a)(1991), 19.102(f)(1)(1991), and 13.121.906(b)(2). Those officials should also consider, as a separate threshold matter, whether "a fair proportion of Government contracts in each industry category is placed with small business concerns" within the relevant organization. 48 CFR 19.502-1(c) (1991). Valix also alleges that the risk evaluation factor of the solicitation, Findings 4-5, was inappropriate because the criteria "are actually determinations of responsibility." Complaint, GROUNDS FOR PROTEST, 3. Responsibility factors may also be used as evaluation factors. Cf. D.M. Potts Corp., B- 247403.2, August 3, 1992, 92-2 CPD 65, at 7-8. Finally, Valix alleges that the technical evaluation criteria provides "implicit, but unstated," evaluation factors. Complaint, GROUNDS FOR PROTEST, 4. This allegation is without merit. An allegation of use of unstated evaluation criteria necessarily involves an examination of the conduct of the evaluation against the stated criteria, not the propriety of the criteria standing alone. Decision For the reasons stated above the protest is GRANTED IN PART. Respondent's delegation of procurement authority is REVISED to require respondent to make another set-aside determination in accordance with regulations, as described above. 40 U.S.C. 759(f)(5)(B)(1988). The procurement may not proceed until that new determination is made. ________________________________ ANTHONY S. BORWICK Board Judge We concur: _________________________ ROBERT W. PARKER Board Judge _________________________ CATHERINE B. HYATT Board Judge