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Avoiding Lost Sales Under Federal Grants and Loans

April 8, 2016

No business wants to voluntarily lose thousands, perhaps even millions of dollars in sales without a good reason. And yet, that is what many business unintentionally do, particularly businesses that sell to entities funding those purchases wholly or in part with federal grants and/or loans.

Recently, for example, the Los Angeles Metropolitan Transit Authority (LA Metro) solicited a single-award Basic Purchasing Agreement (BPA) for spare parts. That business had traditionally gone to the company that originally supplied the Original Equipment Manufacturer. It amounted to several million dollars over the three-to-five year life of the BPA. The Solicitation for the BPA contained provisions indicating that the funds to be used for purchase of the spares were coming from a grant made by the Federal Transportation Administration of the U.S. Department of Transportation (FTA). Buried in the Solicitation was a procedure by which disappointed bidders could contest any award. Also included (by means of reference to an FTA publication — that was not attached) was a relatively short timeline for any such contest, and resolution of it.

A BPA was awarded to an untested competitor of the long-time incumbent, in an irregular fashion, and at a price point that raised serious performance and quality questions regarding the spares. A timely letter questioning the award was submitted to the named office (which, it turned out, was vacant at the time) and at the address specified in the Solicitation with unsatisfactory result. At this point the disappointed bidder sought counsel.

Companies generally consider the cost of pursuing administrative protests such as this as a dead-weight on profitability. Consequently, and too often, they tend simply to walk away — and thus give up what had been years of profitable sales. That need not be the case, especially if a federal grant or loan funds all or some of the acquisition involved. That is because such grants and loans come with detailed requirements for how, where, when, and why the money may be spent. The tendency among grant recipients is to "bank" the money, and overlook the other nice details and associated federal provisos.

These matter are made somewhat more complex by the fact that not all federal grants or loans are made on a uniform basis. Many often result from specific or special-purpose legislation, which may have unique requirements and mandates on both the federal entity involved and the recipient. If compliance with every requirement articulated  is not complete and precise by the recipient entity in a particular contract action, a granting (or lending) agency's review may result in a determination prohibiting use of the money for that action by the grantee (or loan recipient). Moreover, experience teaches us that purchasing departments in entities such as LA Metro are often (through no fault of their own) very short on time and talented procurement professionals, as well as money. Accordingly, compliance with all requirements often may not be as "tight" as one might wish, from the federal perspective.

In the case of LA Metro, the FTA found that it had not complied with the requirements of the grant it had received from FTA to buy the spares. The awarded BPA could not be funded by the FTA grant. Therefore, it would have to be cancelled and re-solicited. Otherwise, LA Metro's own or unrestricted fundswould have to be used by it to pay for purchases under that particular BPA. Since LA Metro's financial posture is weak, the most likely outcome is a grant-compliant resolicitation for its spares. In that circumstance, the incumbent has another opportunity to capture a major piece of business that it otherwise would have lost had it taken no action, or not engaged counsel.

Companies may not always be aware, and it may not always be apparent, whether a given solicitation involves federal funding to any extent. Even partial federal funding (by grant or loan) will involve significant mandates and provisos requiring studious compliance. It therefore is important, as federal involvement with state and local bodies becomes more pervasive, that companies seek counsel early (even at the proposal stage), particularly since many limitations on a company's right to challenge an award often are measured in periods of only a few calendar(not business) days, and any challenge must state its bases for complaint with a high degree of specificity, or even good grounds of challenge may be lost.

Finally, it should be noted that not only governmental (state and municipal) or quasi-governmental entities such as LA Metro receive federal grants and loans. Many 501(c)(3)s and (4)s, and even other approved organizations as well as certain businesses and institutions may receive such federal assistance.

If you have any questions about this alert please contact J. William Eshelman at 202.552.2374 | or another member of Clark Hill's Government Contracts Practice Group.

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