Reinforcing the Rule of Two: The VA's Improper Use of Cascading Evaluations

I. Introduction

Well-settled principles of federal procurement law require agencies to engage in full and open competition, unless a specific exception applies.One such exception, dubbed the “Rule of Two,” applies to the Department of Veterans Affairs (VA) in particular. The Rule of Two requires the VA’s contracting officers to analyze whether they have a reasonable expectation that two or more veteran-owned small businesses (VOSBs) will submit proposals at reasonable and fair prices in response to the solicitation.On the one hand, if the contracting officer determines that she does have such an expectation, then she is required to set aside the procurement exclusively for competition by veteran-owned businesses. On the other hand, if the contracting officer determines that she does not have such an expectation, then she may issue the solicitation on an unrestricted basis using full and open competitive procedures.

The Rule of Two can be onerous in that if, in contrast to her reasonable expectation, the contracting officer does not receive adequate competition in response to a solicitation set aside for VOSBs, then the contracting officer must cancel and reissue the solicitation on an unrestricted basis.Not only must the contracting officer expend time and resources conducting her Rule of Two analysis, but ultimate cancellation of the solicitation further delays the award of the contract and the VA’s ability to procure much needed goods and services.

In response to continued disruption and costs associated with cancelling solicitations that failed to receive adequate competition by small businesses, the VA appears to be increasing its use of an evaluation methodology that the Small Business Administration (SBA) and the U.S. Department of Housing and Urban Development (HUD) developed two decades ago, called a “cascading” or “tiered”evaluation. Instead of issuing a solicitation set aside exclusively for small business concerns, cascading evaluations establish “tiers” of different socioeconomic types of small businesses.For example, the first tier could include all service-disabled veteran-owned small businesses (SDVOSBs), the second tier could include all VOSBs, the third tier could include all other types of small businesses, and the final tier could include all other-than-small businesses.If an agency received insufficient competition at a particular tier, then the evaluation “cascades” down to the next tier. This process would continue until the evaluation reaches the last tier, that is, large business concerns.Because the final-tier evaluation considers proposals from large business concerns, the VA would not have to cancel and reissue the solicitation in the face of insufficient competition from small business concerns.

While cascading evaluations clearly allow the VA to save time and money, it is not clear that the VA has the statutory authority to use this particular evaluation methodology. This article endeavors to review and analyze the Competition in Contracting Act of 1984 (CICA) and its exceptions to determine whether the VA has authority to use cascading evaluations in its procurements. Part II of this article provides background on CICA’s permitted exceptions to the requirement to employ full and open competition as well as the regulations applying those exceptions. Part III discusses the origin of cascading evaluations and their current utilization among agencies and, in particular, the VA. Part IV analyzes whether cascading evaluations meet the requirements outlined in CICA’s exceptions and their corresponding regulations. Additionally, Part V identifies a potential alternative evaluation methodology to cascading evaluations that is consistent with CICA’s exceptions and their associated regulations. Finally, Part VI concludes that, based on the analysis provided for in the article, the VA likely does not have the statutory authority necessary to permit its contracting officers to include cascading evaluations in solicitations.

II. Exceptions to Full & Open Competition

Full and open competition is a fundamental principle of federal government procurement law. Not only does unrestricted competition provide potential contractors with a level playing field on which to compete, but it also ensures that the government receives a fair and reasonable price for needed goods and services.At the same time, the government considers it critical to promote opportunities for small businesses to compete for federal procurements, including SDVOSBs and VOSBs.To accommodate these somewhat opposing policies, Congress enacted certain statutes that require agencies to follow certain procedures to ensure full and open competition, while providing only limited exceptions, such as setting aside a procurement exclusively for participation by small business concerns. These statutes include CICA, the Small Business Act, and the Veterans Benefits, Health Care, and Information Technology Act of 2006 (VA Act).

A. The Competition in Contracting Act of 1984

Congress codified the mandate that agencies provide full and open competition in federal procurements in CICA. CICA reformed the plethora of procurement methods that agencies had been using prior to the time of CICA’s enactment, by establishing a uniform acquisition rubric that was designed to provide “effective competition” in federal government contracting. CICA’s definition of “effective competition” encompasses the same familiar concepts that exist in federal procurement policy today: “[t]o be effective, competition must enable the [g]overnment to acquire products or services at reasonable prices, and it must be efficiently and fairly conducted.” CICA requires agencies to “use the competitive procedure or combination of competitive procedures . . . best suited under the circumstances of the procurement.” These procedures are outlined in both CICA and the Federal Acquisition Regulation (FAR).

Recognizing that full and open competition may not be possible or consistent with other congressionally established goals, CICA permits agencies to conduct procurements that do not meet the requirements for full and open competition in certain limited instances. CICA lists these exceptions explicitly, including when an agency (1) needs to procure specific goods available from one or a limited number of sources and no alternatives are available;(2) faces unusual and compelling urgency;(3) requires a product from a particular source under particular circumstances — namely, a national emergency, to ensure the establishment or maintenance of essential engineering, researching, or development capabilities, or to obtain a particular expert during adjudicatory procedure; (4) must abide by certain circumstances outlined by international agreement or treaties; (5) must abide by certain statutes and procure goods or services from another executive agency, a specific source, or a brand name commercial item for authorized resale;(6) faces national security concerns that necessitate the limitation of sources receiving the solicitation; or (7) determines that public interest favors procedures other than competitive procedures and the agency notifies Congress in writing of that determination.

In addition to these explicit exceptions, CICA provides for one additional, crucial exception: unless Congress affords an agency a particular procurement method that is “expressly authorized by statute.” Procurements by the Federal Prison Industries (UNICOR), qualified nonprofit agencies for the blind or other severely disabled, and the Government Printing Office typically utilize this exception to CICA’s full and open competition requirement. Such procurements also include sole source awards to small business concerns that meet certain socioeconomic criteria.

CICA identifies these exceptions as the “only” permissible instances in which an agency may utilize other than full and open competitive procedures. As such, agencies may use other than full and open competition only when one of the aforementioned exceptions applies.

B. The Small Business Act of 1953

Similar to CICA, the Small Business Act and its subsequent amendments established a policy of ensuring that full and fair competition included the ability for small businesses to compete. In the Small Business Act, Congress declared that “the [g]overnment should aid, counsel, assist, and protect, insofar as possible, the interests of small-business concerns” and established the Small Business Administration (SBA), which was designed to act as a resource for those small businesses interested in contracting with the government.

Additionally, the Small Business Act requires the president to “establish [g]overnment-wide goals for procurement contracts awarded to small business concerns, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women.” In essence, agencies had to balance Congress’s wishes for full and open competition with its simultaneous mandate to meet certain contracting goals with small business concerns.

To achieve the government-wide goals for small business contracting, the Small Business Act provided agencies with an influential tool: the ability to set aside procurements exclusively for participation by small businesses. Procurements set aside for small businesses must still utilize competitive procedures prior to awarding a federal contract; however, those procedures can explicitly limit the competition for a particular solicitation to different socioeconomic types of small business concerns. Furthermore, a procurement set aside for small business concerns, by definition, is limited exclusively to small business concerns.

C. Veterans Benefits, Health Care, and Information Technology Act of 2006

In addition to CICA and the Small Business Act, Congress enacted the VA Act in 2006, which placed further requirements on the VA’s procurement authority. More specifically, the VA Act requires the VA to establish goals for participation in procurements by SDVOSBs and VOSBs. As with the Small Business Act, the VA Act only permits the VA to deviate from full and open competition under certain circumstances, including when procurements are set aside exclusively for competition among SDVOSBs and VOSBs.

D. The Federal Acquisition Regulation’s Implementation of Exceptions to Full and Open Competition

CICA directs that the FAR must “ensure that the requirement to obtain full and open competition is implemented in a manner that is consistent with the need to efficiently fulfill the [g]overnment’s requirements.” Accordingly, the FAR accounts for CICA’s exceptions as well as the other statutory exceptions to full and open competition provided for by the Small Business Act and the VA Act.

1. The Competition in Contracting Act

With respect to CICA, FAR subpart 6.3 outlines the policies and procedures that agencies must follow when restricting competition. While providing the relevant guidance, FAR subpart 6.3 reiterates CICA’s warning that “[c]ontracting without providing for full and open competition or full and open competition after exclusion of sources is a violation of statute, unless permitted by one of the exceptions in 6.302.” Consistent with CICA, FAR subpart 6.3 identifies the following exceptions: (1) when only one responsible source exists and “no other supplies or services will satisfy agency requirements”;(2) when there is an “unusual and compelling urgency”; (3) when the government’s interest in industrial mobilization, expert services, and engineering, developmental, or research capabilities justifies limited procurements;(4) when an international agreement requires other procurement methods;(5) when a different procurement method is explicitly authorized or required by statute; (6) when a national security reason exists for limiting the com- petition to particular sources; and (7) when public interest weighs in favor of other than full and open competition. Accordingly, FAR subpart 6.3 only permits agencies to deviate from engaging in full and open competition if one of the exceptions above applies.

2. The Small Business Act

With respect to the Small Business Act, FAR part 19 addresses the procedures for setting aside procurements for small business concerns. While termed an exception to CICA, in reality FAR part 19 acts more like a mandate than an exception to a mandate. It requires a contracting officer to review each acquisition “to determine if [it] can be set aside for small business ” This review requires the contracting officer to conduct market research, which consists of “collecting and analyzing information about capabilities within the market to satisfy agency needs.” Based on the findings of her market research, the contracting officer determines whether she has a reasonable expectation that “[o]ffers will be obtained from at least two responsible small business concerns offering the products of different small business concerns” and that an “award [can] be made at fair market prices” in order to set aside a procurement for small business concerns. If she cannot make such a reasonable determination, then she is prohibited from setting aside the procurement exclusively for participation by small businesses.

3. The VA Act

Aside from the general requirements that CICA and the Small Business Act place on agencies, the VA Act applies specifically to the VA. Similar to the Small Business Act, the VA Act outlines an exception to employing full and open competition in procurements that acts more like a mandate to set aside procurements for small businesses under particular circumstances. Better known as the Rule of Two in the VA context, the VA Act requires:

[The VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.

Therefore, when a contracting officer determines that her market research demonstrates that the Rule of Two is met, she must set aside the procurement for competition among VOSBs. While not explicit in the statute, arguably, the converse also would be appear to be true: if the contracting officer determines that market research demonstrates that the Rule of Two has not been met, then she cannot set aside the procurement for unrestricted competition.

Despite the apparent general statutory and regulatory mandate to apply the Rule of Two, the VA’s implementation of its obligations has been marred in alleged conflict. After the enactment of the VA Act, the VA argued that it was not obligated to apply the Rule of Two to certain types of procurements, including procurements involving the Federal Supply Schedule (FSS). VOSBs viewed this decision as a deprivation of a statutory entitlement and therefore began challenging the VA’s determination at the U.S. Government Accountability Office (GAO). The GAO ultimately recommended that the VA apply the Rule of Two to all procurements, including orders from the FSS. However, the VA firmly rejected the GAO’s recommendation and instead continued its practice of issuing orders against the FSS without complying with the Rule of Two.

Eventually, one VOSB appealed this decision to the federal courts. In 2016, the Supreme Court directly addressed the application of the Rule of Two in the seminal court case, Kingdomware Technologies, Inc. v. United States. Kingdomware Technologies, Inc. (Kingdomware), a VOSB, claimed that the VA had violated the VA Act by not applying the Rule of Two to FSS procurements.

The Supreme Court unanimously agreed. First, the Court concluded that the statutory text of the VA Act clearly mandated that the VA apply the Rule of Two to procurements. Specifically, Congress utilized the word “shall” in requiring the VA to use the Rule of Two, as opposed to a permissive word, such as “may.” Therefore, the Court reasoned that the VA was required to apply the Rule of Two to each type of procurement that it engaged in, including FSS procurements. Second, the Court identified only two exceptions to the Rule of Two mandate, which applied to procurements with certain dollar thresholds and sole source procurements — not FSS procurements in general. Accordingly, the Court concluded that the VA must apply the Rule of Two to FSS orders.

As a result of Kingdomware, the VA Act therefore requires that the VA apply the Rule of Two to all procurements, unless two narrow exceptions apply.

III. Cascading Evaluations

Twenty years ago, in 1999, HUD and the SBA collaborated to develop cascading evaluations in an effort to seek relief from the potentially onerous consequence of failing to receive adequate competition, namely the cancellation and reissuance of the solicitation, after setting aside a procurement for small businesses as required by the Small Business Act. Since then, the popularity of cascading evaluations appears to have ebbed and flowed. In 2005, cascading evaluations became a hot topic of discussion throughout the procurement community, but then seemed to have fallen to the wayside. According to the VA, it began increasing its use of cascading evaluations in response to the Supreme Court’s decision in Kingdomware and the need to expand its application of the Rule of Two to additional categories of procurements previously subjected to full and open competition. Despite their long history and apparent use, few authorities have substantively commented on the use of cascading evaluations.

A. Congressional Authorization of Cascading Evaluations for Use by the DoD

Congress itself finally addressed the use of cascading evaluations in 2006. As part of the National Defense Authorization Act for Fiscal Year 2006 (NDAA 2006), Congress authorized the Department of Defense (DoD) to utilize “tiered” evaluations. Entitled “Guidance on Use of Tiered Evaluations of Offers for Contracts and Task Orders Under Contracts,” section 816, which was codified at 10 U.S.C. § 2305, required the Secretary of Defense to “prescribe guidance for the military departments and the Defense Agencies on the use of tiered evaluations of offers for contracts and for task or delivery orders under contracts.” Congress further required the Secretary of Defense to prohibit the use of cascading evaluations unless a contracting officer had conducted adequate market research and could not determine whether there was sufficient competition among small businesses “to justify limiting competition.” Accordingly, cascading evaluations received Congress’s blessing — but even then, Congress limited its explicit statutory authorization to DoD agencies.

In response to Congress’s authorization to utilize cascading evaluations, the DoD promulgated the Defense Federal Acquisition Regulations Supplement (DFARS) subsection 215.203-70, “Request for proposals — tiered evaluation of offers.” The DFARS clause provides that to utilize a cascading evaluation, a contracting officer must (1) conduct market research consistent with FAR requirements; and (2) conclude that she cannot determine whether the criteria for setting aside the acquisition for small businesses have been met. In other words, the DFARS subsection states a version of the Rule of Two similar to the Small Business Act’s requirements, except that the market research analysis should be inconclusive. If the two requirements are met, then the contracting officer is permitted to include a cascading evaluation in a solicitation as long as the cascading evaluation (1) uses an order of precedence consistent with FAR part 19, and (2) consideration is given to small business concerns before consideration is given to large business concerns. Accordingly, the DoD has statutory authority to engage in cascading evaluations under the circumstances outlined in the NDAA 2006 and the subsequently issued DFARS clause.

B. The VA’s Use of Cascading Evaluations

Congress has yet to explicitly comment on the VA’s (or other civilian agencies’) ability to utilize cascading evaluations. However, on February 8, 2018, the Deputy Senior Procurement Executive issued VA Procurement Policy Memorandum 2018-04 (PPM), entitled “Guidance and Procedures regarding use of Tiered Evaluations (Cascading) for use in solicitations set-aside in accordance with the VA Rule of Two.” The PPM explained that VA contracting officers had requested guidance and specific procedures regarding the use of cascading evaluations, particularly in conjunction with the Rule of Two. In the PPM, the VA states that each tier of a cascading evaluation is a completely separate set-aside procurement from the other tiers. In other words, a contracting officer should evaluate the offers available at the highest tier, and, if there was insufficient competition, she should then cascade down to the next highest tier, but she would only be permitted to consider the offers in the second highest tier during her corresponding evaluation — and not the first tier. Furthermore, because each tier is considered a separate procurement, the PPM concluded that the use of cascading evaluations was consistent with the Rule of Two.

In conjunction with these new policies, the PPM established three different types of cascading evaluations. First, the PPM created a cascading evaluation consisting of two tiers: the first would be limited to SDVOSBs and the second would consist of VOSBs. If there was insufficient competition at a reasonable price among both tiers, the PPM instructs the contracting officer to “cancel the solicitation, document that cancellation in a memorandum for the record, and resolicit as either a small business set-aside or an unrestricted procurement.” Second, the PPM instituted a cascading evaluation with the same parameters, although added an additional third tier for other small businesses. Third, and finally, the PPM established a cascading evaluation, again with the same parameters, but that added a fourth tier that included large business concerns.

As outlined by the PPM and further discussion by the VA, the VA’s reasons for increasing its use of cascading evaluations are twofold. First, the VA’s goal for issuing the policy “is to minimize delays in the re-solicitation process that are incurred subsequent to the application of the VA Rule of Two.” In other words, the VA believes that cascading evaluations relieve it of having to cancel and reissue a solicitation that was originally set aside for small businesses if it does not receive sufficient competition from those small businesses, as mandated by FAR subsection 19.502-2. Second, the VA concludes that cascading evaluations will ensure that it can obtain a reasonable and fair price. During a town hall on cascading evaluations, the Office of Small and Disadvantaged Business Utilization (OSDBU) explained that the prices of all offerors at each tier are reviewed against each other and the Independent Government Cost Estimate to determine whether a small business is offering a reasonable and fair price.

The VA also asserts that cascading evaluations are ultimately beneficial for SDVOSBs and VOSBs. First, when market research is not able to confirm the presence of two small businesses that could compete, FAR subsection 19.502-2 technically requires the use of full and open competition. However, cascading evaluations provide small businesses an opportunity to compete first, prior to any other tier of small businesses or the final tier for large business concerns. Second, the VA asserts that cascading evaluations permits the contracting officer to analyze the reasonableness of the proposed prices at a particular tier and then negotiate the price down if it is too high, without having to move to a new tier. The VA maintains that cascading evaluations strike an appropriate balance between timely obtaining the goods and services it needs at a reasonable and fair price with its goals and obligations for providing contracting services to SDVOSBs and VOSBs.

Following the issuance of the PPM, the VA issued a class deviation from FAR subsection 19.502-2, “Total Small Business Set-Asides.” Class deviations authorize certain contract actions to utilize “lesser or greater limitations on the use of any solicitation provision, contract clause, policy, or procedure prescribed by the FAR or [the VA Acquisition Regulation] VAAR.” The VA issued the class deviation to permit the third type of cascading evaluations that it recommended to its contracting officers: the cascading evaluation that includes a tier for large business concerns. The class deviation was necessary because, as the VA explained, “[t]he current language in the FAR limits the effectiveness of the PPM by requiring the contracting officer to withdraw the set-aside and resolicit the requirement if no acceptable offers are received from responsible small business concerns.” As such, the class deviation eliminates the FAR subsection 19.502-2’s requirement to cancel and reissue a solicitation set aside for small businesses if there is inadequate competition.

Despite the VA’s optimism about its implementation of cascading evaluations, the contracting community appears wary of their potential effects. On the one hand, large business concerns competing for government contracts that contain cascading evaluations are frustrated by the potential that their proposal may not even be considered. After spending significant time and money on bid and proposal costs, large business concerns have no concept of the potential for award of a contract. Responding to solicitations that include cascading evaluations — when the offers of large business concerns may end up not even considered — may also prevent large business concerns from expending resources on other procurements. Furthermore, if a large business concern wants to compete in a procurement that contains a cascading evaluation, it needs to make a strategic business decision regarding whether it will need to partner with a small business concern, which may make it more competitive but at lesser profit. This process would likely require additional time and money to prepare a proposal that complies with the subcontracting rules for large business concerns under a contract set aside for small businesses.

Small business concerns, on the other hand, are worried that cascading evaluations may be yet another method by which the VA can avoid application of the Rule of Two. Like large business concerns, small business concerns also face a difficult decision regarding whether to spend the time and money to prepare a bid or proposal. If their socioeconomic status is in a lower tier, there is also a lesser chance that their bids or proposals are even considered. At the same time, the VA may not see the benefits it seeks. If large business concerns and lower-tier small business concerns decline to compete in a procurement that contains a cascading evaluation, “agencies will inevitably pay higher prices because of the lack of full and open competition,” thwarting one of the VA’s main purposes for permitting the use of cascading evaluations. Despite the VA’s assurances that cascading evaluations are beneficial for SDVOSBs and VOSBs, the use of cascading evaluations could end up hurting other small business concerns.

C. Procurement Community Decisions

Even though cascading evaluations have been around for twenty years, adjudicators in the public procurement community have not had an opportunity to analyze the origins and supposed legality of cascading evaluations. For example, in Greenleaf Construction Co. v. United States, the U.S. Court of Federal Claims examined the application of a cascading evaluation, but not the procedure itself. Additionally, in 1999, the GAO similarly reviewed the application of a cascading evaluation — not the legality of the evaluation methodology.

The closest the GAO ever came to review a cascading evaluation was in 1983. In Educational Services Group, the GAO addressed a cascading evaluation (although it was not identified as such) in favor of Native American organizations. There, the Department of Health and Human Services (HHS) attempted to implement the Native American Programs Act of 1974 by promulgating a regulation that created a “preference” for Native American businesses. The “preference” required “negotiation and award solely with Indian organizations if one or more Indian organizations or Indian-owned economic enterprises [were] within the competitive range.” However, the statute that HHS relied on in promulgating the relevant regulation did not, in fact, allow for a cascading evaluation. The GAO concluded that the regulation permitting the use of cascading evaluations lacked statutory authority and therefore was inconsistent with the “maximum competition” requirement of the Federal Procurement Regulations.

More recently, although still over ten years ago, in 2007, a protester specifically challenged the VA’s use of a cascading evaluation, claiming that it violated FAR section 19.1405. However, the protester disputed the inclusion of the cascading evaluation in a post-award protest. The GAO construed the argument as a challenge to the terms of the solicitation and concluded that it was therefore untimely. Notably, the GAO explicitly opened the door for a timely pre-award protest to a cascading evaluation, although it does not appear that anyone has taken it up on that offer.

Despite the widespread use of cascading evaluations for decades, the VA’s decision to move forward with their implementation of a formal policy regarding the inclusion of cascading evaluations in various solicitations presents a unique opportunity to revisit their legality, specifically with respect to those cascading evaluations that include large business concerns. The VA must abide by the myriad of statutes and regulatory provisions that govern procurement evaluation methodologies. Without a clear evaluation of whether cascading evaluations fit within the requirements described below, the VA could be proceeding in violation of the clear procurement policies regarding full and open competition and small business concerns that Congress has established and that the Supreme Court has upheld.

IV. The Legality of Cascading Evaluations

Cascading evaluations were the brainchild of agencies seeking efficiency. Since then, Congress has enacted several new statutes governing agencies’ procurement authority. It is time to stop and review the actual authority that Congress has provided and to consider whether that authority includes the use of cascading evaluations. This analysis demonstrates that the VA does not, in fact, have statutory authority to utilize cascading evaluations in solicitations that permit large business concerns to submit offers.

A. Cascading Evaluations Do Not Provide for Full and Open Competition.

CICA mandates that agencies use full and open competitive procedures in their procurements. While cascading evaluations could be considered full and open competition in the sense that they usually accept proposals from both large and small business concerns, their methodology clearly limits competition. Each cascading evaluation’s tier effectively constitutes a procurement in and of itself, as an agency would only consider proposals that fit within each tier, and offers in different tiers are never compared to each other. Furthermore, an award could be made at an earlier tier, leaving other validly submitted offers on the table and unopened. This limitation applies even to the lowest tier, which only reviews offers from large business concerns, to the exclusion of small business concerns. Accordingly, competition is effectively limited to particular sources at each tier. Thus, cascading evaluations do not constitute full and open competition.

B. None of CICA’s Specified Exceptions Applies to Cascading Evaluations.

Although cascading evaluations do not provide for full and open competition, agencies would still have the authority to use them if they meet the requirements of one of CICA’s articulated exceptions. CICA provides for three specific exceptions, including section 3303, section 3304(a), and section 3305. None of these sections encompasses an authorization for the VA to utilize cascading evaluations that include both large and small business concerns.

First, section 3303 permits agencies to exclude certain sources from a procurement. This exception still requires agencies to utilize competitive procedures, but allows an agency to exclude particular, identified potential offerors “to establish or maintain an alternative source of supply for [an acquisition of the] property or service.” Such actions must be in furtherance of various goals, including an effort to “increase or maintain competition [that will] likely result in reduced overall cost for” an acquisition. This section also explicitly permits agencies to conduct competitive procurements exclusively among small business concerns. None of these provisions provides authorization for conducting cascading evaluations. As discussed more thoroughly infra, procurements employing cascading evaluations are not set aside exclusively for small business concerns. Additionally, cascading evaluations do not exclude particular sources from the offerors. Therefore, this CICA exception does not authorize agencies to use cascading evaluations as their procurement methodology.

Second, section 3304(a) provides a list of certain instances in which an agency may utilize non-competitive procedures, which are described above. Most of these circumstances deal with national security concerns or require procurement from specific sources, such as when property or services are only available from one resource, there is an unusual or compelling urgency in the need for a particular property or service, a national security justification for essential engineering, researching, or development capabilities, an international agreement or treaty applies to the procurement, or procurement from a particular source is needed. None of these instances applies to cascading evaluations. Although cascading evaluations may limit competition to a particular tier, agencies have not cited to any of these justifications for doing so, nor have they limited competition to particular, identified sources. Rather, agencies simply organize all of the offers they receive into tiers and evaluate the offers in each tier against each other. Accordingly, this CICA exception does not authorize the use of cascading evaluations.

Third, section 3305 provides agencies the ability to establish simplified acquisition procedures for procurements under certain circumstances, one of which is when the expected amount of the procurement is either lower than the simplified acquisition threshold or higher than the simplified acquisition threshold but not greater than five million dollars. However, the use of a cascading evaluation is tied to the outcome of market research — and not to a particular dollar amount.Accordingly, this exception does not authorize the use of cascading evaluations.

In short, cascading evaluations limit competition, and none of CICA’s specific exceptions to full and open competition applies. CICA provides for one further exception to the requirement to provide for full and open competition: when another statute provides explicit authorization. Accordingly, an agency may only employ cascading evaluations in their procurements if another statute has provided the relevant authority to do so.

C. Cascading Evaluations Do Not Meet the Requirements to Be a Set-Aside Procurement.

Although both the VA and the SBA classify cascading evaluations as set-aside procurement, cascading evaluation are inconsistent with the requirements set forth in CICA and the Small Business Act permitting procurements set aside for small businesses. In particular, the VA believes that each tier of a cascading evaluation constitutes a different “set-aside,” which, if insufficient competition exists, must be “cancelled” prior to cascading down to the next tier for analysis. The SBA also asserts that cascading evaluations are “a subset of small business set asides.” Consistent with this conclusion, the SBA claims that “regulations governing small business set asides govern[] cascading procurements as well.” However, cascading evaluations, by their very nature, are inconsistent with numerous statutory and regulatory requirements that procurements set aside for small businesses must meet.

Cascading evaluations do not meet the definition of a set-aside procurement that CICA established. In CICA, Congress provided agencies with the authority to “provide for the procurement of property or services covered by section 3301 of this title using competitive procedures, but excluding other than small business concerns in furtherance of sections 9 and 15 of the Small Business Act. . . . ” Furthermore, the FAR explicitly identifies certain procurements that are to be “reserved exclusively for small business concerns.” By Congress’s own definition, set-asides must prohibit the participation of large business concerns in procurements set aside for small businesses. However, procurements that employ cascading evaluations do not limit a competition to only small business concerns because they permit large business concerns to submit responsive proposals. The VA does not consider the large business concerns’ proposals until it concludes that there is insufficient competition at the higher tiers of the evaluation; nonetheless, large business concerns are participating in the procurement. The inclusion of large business concerns in the competition clearly contradicts the definition of a procurement set aside for small businesses.

Cascading evaluations are also inconsistent with several FAR part 19 provisions that govern set-aside procurements. First, FAR section 19.501 provides agencies the ability to issue small business set-asides for the purpose of awarding “certain acquisitions exclusively to small business concerns.” It further defines a “set-aside for small business” as “the reserving of an acquisition exclusively for participation by small business concerns.” However, large business concerns can prepare and submit proposals in response to procurements contain cascading evaluations. Therefore, procurements with cascading evaluations cannot meet the definition of a procurement “set-aside for small business.”

Second, cascading evaluations are inconsistent with the market research mandates outlined in FAR section 19.501 and subsection 19.502-2. FAR section 19.501 provides that market research must be conducted before determining whether to set aside a procurement for competition exclusively among small businesses. FAR subsection 19.502-2 sets forth the competition requirements for total small business set-asides procurements. It mandates that contracting officers utilize the SBA’s version of the Rule of Two and set aside procurements for which they have a reasonable expectation that “at least two responsible small business concerns” will submit offers or bids and award can be made at a fair market price. Importantly, FAR subsection 19.502-2 explicitly prohibits the use of total small business set-asides “unless such a reasonable expectation exists.” Contracting officers employ cascading evaluations when the results of their market research are unclear as to whether at least two responsible small business concerns will submit offers or bids at fair market prices. Furthermore, cascading evaluations provide that contracting officers can cancel a “set aside” of a particular tier and cascading down to the next tier, which constitutes another set aside procurement, without conducting market research. Accordingly, procurements with cascading evaluations cannot meet the requirements of FAR section 19.501 and subsection 19.502-2 because, in contrast to those requirements, the contracting officer determines that she does not have a reasonable expectation of adequate competition.

Third, cascading evaluations conflict with FAR subsection 19.502-2 and section 19.1405. While FAR subsection 19.502-2 applies to total small business set-asides, FAR section 19.1405 sets forth the procedures for setting aside procurements for SDVOBs only. Both FAR subsection 19.502-2 and section 19.1405 require the contracting officer to withdraw and reissue the solicitation as unrestricted or as a small business set-aside procurement, respectively, in the event that the contracting officer fails to receive adequate competition. However, cascading evaluations do not abide by this requirement. Rather than cancel and reissue the solicitation, contracting officers are “cascading” down to the next “tier” in the procurement. The VA attempts to call the cascading process a cancellation and reissuance of the solicitation; however, a mere label does not make it so. The cancellation and reissuance of a solicitation involves, among other steps, the issuance of a revised solicitation and the collection of proposals. Cascading down to the next tier in an evaluation does not involve the issuance of a revised solicitation and the collection of proposals. Accordingly, procurements using cascading evaluations cannot meet the requirements set forth in FAR subsection 19.502-2 and section 19.1405.

Recognizing conflicts between the FAR and cascading evaluations, the VA attempted to rectify at least one of them. The VA issued a class deviation in response to FAR subsection 19.502-2, which, according to the VA, was “needed to allow the contracting officer to follow tiered evaluation procedures, if permitted in the solicitation, and not require the solicitation to be cancelled and resolicited.” The class deviation also permits the use of cascading evaluations with the lowest tier being large business concerns. While the class deviation is a needed first step to resolving the conflicts between cascading evaluations and the FAR requirements, it does not provide a deviation from all of the conflicting FAR clauses, such as the mandate that set-aside procurements are prohibited unless market research demonstrates that two or more responsible small businesses would submit proposals at fair market value. Accordingly, conflicts between the FAR and cascading evaluations still exist.

Despite the VA’s (and the SBA’s) insistence on labeling cascading evaluations as either a set-aside or subset of set-aside procurements, cascading evaluations are inconsistent with several provisions of FAR part 19, and the VA’s class deviation does not adequately provide for the necessary exceptions. Therefore, agencies, including the VA, must look elsewhere for the statutory authority to conduct cascading evolutions.

D. The VA Act Does Not Provide the VA with the Authority to Use Cascading Evaluations.

CICA provides a catch-all exception for “procurement procedures otherwise expressly authorized by statute.” As previously discussed, agencies must have statutory authority to engage in other than full and open competition. In the context of cascading evaluations, the SBA has also recognized that agencies must have statutory authority. According to the VA’s Office of Acquisition and Logistics (OAL), cascading evaluations are authorized pursuant to the VA Act and, in particular, the provisions codified at 38 U.S.C. § 8127. Section 8127 sets forth a myriad of requirements with respect to the establishment of contracting goals and preferences for small business concerns owned and controlled by veterans.

Despite the VA’s citations, nothing in a plain language reading of section 8127 evidences that Congress intended to authorize the VA to conduct “cascading” or “tiered” evaluations in procurements when marketing research was inconclusive. Section 8127 does not utilize the terms “cascade” or “tiered” or any variations thereof. Nor does it describe a procurement methodology by which the VA may solicit proposals from all types of businesses and then con- sider only a subset for adequate competition. Nor does it mention market research or the outcome of market research. Accordingly, on its face, section 8127 does not support the VA’s contention that it authorizes the VA to use cascading evaluations.

Instead, section 8127 provides three evaluation methods by which contracting officers can award contracts using other than full and open competitive procedures. As with the CICA exceptions, none of these would permit cascading evaluations. First, one provision establishes that contracting officers can use procedures other than competitive procedures to enter into contracts with VOSBs for less than the simplified acquisition threshold. However, the VA implies that it has authority to use cascading evaluations in “all competitive procurements” when market research is inconclusive as to whether there will be adequate competition among those small businesses for which the set- aside is intended to benefit. Accordingly, this exception would not authorize the VA’s use of cascading evaluations.

Second, section 8127 permits contracting officers to award sole source contracts above the simplified acquisition threshold under certain conditions. Again, this provision would not permit the extensive use of cascading evaluations that the VA has articulated — namely, in any relevant procurement when the contracting officer meets the requirements set forth in the PPM. Accordingly, this exception does not permit the VA to insert cascading evaluation methodologies into its solicitations.

Third, section 8127—relating to the Rule of Two — provides that a contracting officer can limit a competition to:

[S]mall business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers [the] best value to the United States.

However, the VA’s Rule of Two fails to provide for the inclusion of large business concerns as a final tier in the cascading evaluation. As a result, cascading evaluations do not fall under this exception to full and open competition. Rather than rely on any of the above exceptions to full and open competition, the VA points to section 8127(i) to demonstrate that it has authorization to utilize cascading evaluations. Section 8127(i) establishes “[p]references for awarding contracts to small business concerns.” These preferences constitute a hierarchy of different types of socioeconomic small business concerns that receive “priority” over other small businesses with regard to contract awards. However, as discussed earlier, nothing in the plain text of this provision mentions “cascade” or “tiered” or suggests that, if competition is inadequate for a particular type of small business, the VA can “cascade” down to the next group of socioeconomic small businesses.

Furthermore, section 8127(i) is limited to small business concerns, which is inconsistent with the VA’s inclusion of large business concerns as a final tier. Section 8127(i) establishes an order of priority specifically “for awarding contracts to small business concerns.” It does not list large business concerns. Rather, at most, this section provides for various preferences that could be applied to certain types of small business concerns over other types of small business concerns during a small business set-aside competition. The plain language of the statute therefore refutes the VA’s allegation that it authorizes the use of cascading evaluations.

Underscoring the conclusion that section 8127(i) fails to authorize cascading evaluations is that Congress knows how to authorize cascading evaluations, and it has not done so for the VA. In the NDAA 2006, Congress included a note to 10 U.S.C. § 2305 entitled, “Guidance on Use of Tiered Evaluations of Offers for Contracts and Task Orders under Contracts.” This note, which holds the same force as law, requires the Secretary of Defense to prescribe guidance for defense agencies for using tiered or cascading evaluations. As such, Congress knows how to draft a statute authorizing agencies to use cascading evaluations and, when it does, specifically uses terms that include “tiered evaluations.” If Congress intended for section 8127 to provide the VA with the authority to conduct cascading evaluations, it would have provided that power explicitly.

Additionally, Congress’s actions subsequent to the NDAA 2006 demonstrate that it considered providing civilian agencies, such as the VA, authority to conduct cascading evaluations, but it ultimately did not. In 2007, the Senate passed the Accountability in Government Contracting Act, which contained a provision similar to that outlined in the NDAA 2006 for the DoD agencies. However, the House never passed a corresponding bill. Accordingly, the civilian agencies’ ability to conduct cascading evaluations died with the Accountability in Government Contracting Act. Therefore, Congress recognized that it had not provided civilian authorities the ability to use cascading evaluations, although it had for the DoD.

The VA’s recent use of cascading evaluations constitutes a virtuous effort to include small business concerns in competitions they otherwise would not have access to; however, the VA may only pursue such endeavors when they are consistent with congressional mandates and authorizations. Here, the VA decided to encourage the use of cascading evaluations without stopping to consider whether it truly had permission to use them. As demonstrated previously, cascading evaluations are inconsistent with every statute and exception that Congress established. Accordingly, the VA’s use of cascading evaluations that include large business concerns as the final tier is improper.

V. A Potentail Solution

Even though cascading evaluations may not have statutory authority, the ultimate goal the VA seeks to achieve — avoiding having to cancel and reissue solicitations set aside for small business concerns that do not receive sufficient competition — could be achieved utilizing a different methodology. Instead of assigning tiers and only considering proposals among those tiers, the VA could use the preference authority that Congress provided it in subsection 8127(i). When a contracting officer’s market research is inconclusive, the procurement cannot be set aside for competition exclusively among small business concerns (or, in the VA’s case, VOSB concerns). However, the contracting officer could use her authority from section 8127(i) to assign evaluation preferences to different types of socioeconomic small business concerns. That way, small business concerns receive priority in award, but, if the procurement receives insufficient competition from small business concerns, the agency is not required to cancel and reissue the solicitation.

The use of evaluation preferences in procurements would allow small businesses to continue to maintain the priority that the VA seeks to afford them. The VA could also ensure that it receives a fair and reasonable price by comparing the proposed prices among all offerors, small and large. Additionally, large business concerns actually would be able to compete in the procurement, instead of wasting time and money on offers that may never be read by the VA. Finally, the VA would no longer have to cancel and reissue a solicitation in the face of inadequate competition from small business concerns.

The beauty of evaluation preferences is that Congress has already authorized them. If it decided to use evaluation preferences, the VA would be complying with CICA. In HAP Construction, Inc., the GAO stated that the use of evaluation preferences reflected a type of limitation on full and open competition. Accordingly, a CICA exception to full and open competition would have to apply for the VA to use evaluation preferences. Here, the VA Act explicitly provides for the use of evaluation preferences. As such, evaluation preferences meet the CICA exception for procurement methodologies that are explicitly authorized by statute.

The GAO has previously recognized that establishing evaluation preferences is acceptable.For example, in Charles A. Martin & Associates, the solicitation stated that “qualified minority-owned firms will be assigned additional points for consideration for selection.” A potential offeror challenged the inclusion of the evaluation preference for qualified minority-owned firms, contending that there was no legal basis for applying such a preference. After briefly acknowledging the SBA’s small business goals for procurement participation, the GAO explained that it has “not objected to the establishment of an evaluation preference, that is, the assignment of additional points to a firm based on its small business minority status, in order to implement the statutory policy of encouraging the participation of such firms in government contracting.”

In short, instead of trying to force a square peg into a round hole, the VA could use evaluation preferences to meet its procurement socioeconomic goals. Using evaluation preferences would obviate the need for a class deviation, and it would solve the apparent conflicts between cascading evaluations and current requirements set forth in both law and regulations. While the VA has understandably sunk time and energy into making it possible for its contracting officers to use cascading evaluations, the better path forward might be to pivot to using evaluation preferences.

VI. Conclusion

Given the effects cascading evaluations have not only on large businesses, but on small businesses as well, civilian agencies might want to carefully consider whether cascading evaluations are an authorized and appropriate procurement evaluation methodology. The VA has even more stringent restrictions on its procurement methodologies, which should counsel additional consideration. As the Supreme Court explained in Kingdomware, the Rule of Two is mandatory, and the VA procurement methodologies need to comply with it. Cascading evaluations do not appear to fit the bill. Accordingly, the VA should reconsider whether its use of cascading evaluations for ensuring contracting opportunities for SDVOSBs and VOSBs is consistent with applicable laws and regulations.