Contractors gamble more on legal fights after losing federal bids

July 31, 2011

When Oshkosh Corp. won a $281 million contract to supply tactical trucks and trailers to the U.S. Army, the losing bidders challenged the award at the Government Accountability Office.

The GAO sided with the protesters, Navistar International and BAE Systems. It recommended that the Army reevaluate the proposals and, regardless of the eventual winner, reimburse Navistar and BAE for their legal fees. The Army paid the companies $480,000.

The burden for most of the costs associated with bid protests falls on companies, even when they win. If the GAO sides with a protester, the contracting agency is responsible for paying a portion of the company’s legal fees. The difference between what the agency will pay and the rate charged by leading bid protest lawyers can be as much as $500 per hour.

Because of declining procurements budgets, companies may be more willing to try protesting as an option, said Michael Mason, a partner at Hogan Lovells in Washington.

“For larger programs, I think procurement decisions will probably be given even more scrutiny now,” Mason said. “I think a company is really going to scrutinize whether the decision was fair and reasonable’’ and maybe give more thought to protesting than “it otherwise would have if there were other large procurements in the pipeline.”

Reimbursements

Bloomberg Government obtained records under the Freedom of Information Act from 21 federal agencies on reimbursements paid to contractors for successful protests.

In the fiscal year that ended Sept. 30, the GAO recommended that agencies reimburse at least 47 protesters. The agencies paid out a total of about $1.6 million to 28 of those successful protesters, according to an analysis of the claims. Nine companies did not submit a request for reimbursement, did not get reimbursed or are still in discussions with agencies on the amount.

Six agencies, including the Justice Department and the Centers for Medicare and Medicaid Services, declined to provide figures on how much they paid out in the 10 other cases.

Successful protesters received more than $56,000 on average. The reimbursements ranged from $1,035 paid to Biblia, a tugboat servicing company in Savannah, Ga., to the $480,000 paid to BAE and Navistar.

Contractors often are willing to bear the costs of a protest for a chance to keep competing, said Joseph Hornyak, a partner with Holland & Knight in McLean.

“Contractors sometimes spend seven figures on a proposal effort,” he said. “If you’ve already sunk a million dollars on a proposal, it might cost another $50,000 to $100,000 to file a protest.”

Complex protests can lead to bills for hundreds or thousands of hours of legal work, said Mason, co-chair of an American Bar Association group focused on bid protests.

“For the larger, more complex procurements, where the dollar value of the contract is very large, you’re more likely to have a large team involved and the litigation may be a lot more intense,” he said. “It’s safe to say we’re talking at least hundreds of hours, and it can get over a thousand hours if it’s a very, very large case.”

$150-per-hour cap

Starting in 1994, Congress set a $150-per-hour cap for the legal fees that large businesses can charge agencies for reimbursement. The GAO has allowed companies to adjust the limit for inflation and seek fees of as much as $215 per hour. Small businesses are exempt from that cap and have sought as much as $705 per hour in legal fees, according to GAO decisions.

When companies “bear the expense of challenging the government and they prevail, then the government will reimburse them the cost” of the protest, said Ralph White, GAO’s managing associate general counsel for procurement law. The system lets companies help “make sure procurements are conducted in a manner consistent with law and regulation.”

Usually these reimbursements do not cover the full cost of protesting, lawyers who specialize in bid protests said.

If a company wins a contract and another business protests, the winner is allowed to intervene and argue along with the government that the contract was fairly awarded. While the winning vendor can get reimbursed by the government for most expenses associated with the contract, the costs of defending the contract against a protest often aren’t allowed and the business must pay out of pocket, Hornyak said.

NASA, for example awarded $3.5 billion in December 2008 to Orbital Sciences and closely held Space Exploration Technologies, or SpaceX, to deliver cargo to the international space station after the shuttle fleet’s retirement.

PlanetSpace, which partnered with Boeing, Lockheed Martin and Alliant Techsystems to bid on the contract, filed a protest with the GAO. Both Orbital and SpaceX intervened in the dispute, hiring lawyers to argue that NASA fairly awarded the contract.

The agency denied PlanetSpace’s protest in April 2009, and the Chicago-based company filed a lawsuit at the U.S. Court of Federal Claims in July 2009 challenging the award again. Judge Lawrence J. Block sided with NASA, Orbital and SpaceX in a December decision.

In a Feb. 28 filing, Orbital said it spent more than $1 million in legal fees in 2009 defending its award. Barron Beneski, a spokesman for Orbital, did not respond to calls and e-mails for comment on how much the company spent in 2010.

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